Activity Base Costing Flashcards
(24 cards)
What is Activity-Based Costing (ABC)?
ABC is a costing method that assigns overheads to products based on activities that drive costs, not just volume.
How does ABC differ from traditional costing?
Traditional costing allocates overhead based on volume (e.g., labor hours), while ABC uses cost drivers linked to activities.
What are cost drivers in ABC?
Cost drivers are factors that cause or relate to the cost of an activity, such as number of setups or orders.
What is an activity cost pool?
A grouping of all costs associated with a specific activity (e.g., machine setups).
What is the main benefit of using ABC?
ABC improves cost accuracy, especially when products consume overheads differently.
Why is ABC especially useful for complex production environments?
Because it reveals the true cost of products with varying resource usage, helping avoid cross-subsidization.
What are the steps to apply ABC costing?
1) Identify activities, 2) Assign costs to activity pools, 3) Identify cost drivers, 4) Calculate cost driver rates, 5) Assign overheads to products.
Activity: Machine setups. Cost pool = $60,000. Total setups = 300. What’s the cost driver rate?
$200 per setup ($60,000 ÷ 300).
A product requires 5 setups. Setup cost driver rate is $200. What is its setup overhead cost?
$1,000 (5 × $200).
Inspection cost pool = $45,000. Total inspections = 900. What’s the rate per inspection?
$50 per inspection ($45,000 ÷ 900).
Product A uses 20 inspections. Rate = $50. What’s the allocated inspection cost?
$1,000 (20 × $50).
Ordering cost pool = $30,000. Total orders = 600. Product X has 15 orders. What cost is assigned to X?
$750 (15 × $50, where $50 = $30,000 ÷ 600).
Product A: Setup cost = $1,000; Inspection = $1,000; Ordering = $750. What’s total overhead?
$2,750 (sum of all ABC activity costs).
What kind of products are likely to be under-costed using traditional costing?
Complex, low-volume products that use more support activities.
What kind of products are over-costed using traditional costing?
Simple, high-volume products that use fewer activities but get allocated too much overhead.
What is batch-level activity in ABC?
An activity that relates to a group or batch of units, like machine setups.
What is a unit-level activity?
An activity performed each time a unit is produced, like using direct materials.
What is a product-level activity?
An activity done to support an individual product regardless of volume, e.g., product design.
What is a facility-level activity?
An activity related to overall operations, like factory rent — usually not assigned to products directly.
Why might ABC not always be used in practice?
It can be costly and complex to implement, and not all overheads are easily traced to activities.
How does ABC help in pricing decisions?
It provides a more accurate product cost, leading to better pricing and profitability analysis.
Why is identifying the correct cost driver important?
The accuracy of ABC depends on linking activity costs to true cost drivers.
Can ABC be used for service organizations?
Yes, ABC is applicable to services by assigning indirect costs to service activities.
What’s the key exam point when comparing ABC vs traditional costing?
Focus on cost accuracy and differences in overhead allocation outcomes.
