Ch 5 Flashcards
(16 cards)
What is the main difference between Activity-Based Costing (ABC) and Traditional Costing?
ABC allocates overhead costs based on multiple activities and cost drivers, while Traditional Costing uses a single predetermined rate.
Traditional Costing assumes that all overhead costs are driven by a single activity.
What is a predetermined overhead rate (POR)?
A rate used to allocate overhead costs based on a specific activity or driver.
In Traditional Costing, direct labor hours or dollars were often used as the basis for this rate.
What are the key factors leading to the need for Activity-Based Costing?
- Increasing changes in manufacturing and service industry technology
- International competition
- Technological competition
- Advances in computerization and automation
These factors necessitate better quality cost information.
Define ‘Activity’ in the context of Activity-Based Costing.
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
What is an ‘Activity Cost Pool’?
A distinct type of activity, such as ordering materials or setting up machines.
What are ‘Cost Drivers’?
Any factors or activities that have a direct cause-effect relationship with the resources consumed.
List the four steps to allocate overhead costs using Activity-Based Costing.
- Identify and classify major activities in the manufacturing process
- Identify the cost driver
- Calculate the activity-based overhead rate
- Allocate overhead costs to products using the activity-based overhead rate.
True or False: Activity-Based Costing replaces Traditional Costing.
False.
ABC supplements Traditional Costing but does not replace it.
What are the benefits of Activity-Based Costing?
- More accurate product costing
- Improved overhead cost control
- Better management decisions
- Development of performance standards
To gain full advantage, costs within pools must correlate with the driver.
What are the four levels of activity in the hierarchy/classification of activity levels?
- Unit-level activities
- Batch-level activities
- Product-level activities
- Facility-level activities.
Fill in the blank: An _______ activity increases the perceived value of a company’s product or service.
Value-Added
Fill in the blank: A _______ activity adds cost without increasing the perceived value of a product or service.
Non-Value-Added
What is the purpose of Activity Flowcharts in Activity-Based Costing?
To identify value-added and non-value-added activities.
What are some limitations of Activity-Based Costing?
Can be expensive to use; costs in identifying value-added activities, cost drivers, and various cost pools.
When should Activity-Based Costing be used?
- Product lines differ greatly in volume and manufacturing complexity
- Numerous and diverse product lines requiring different support services
- Overhead costs are significant portions of total costs
- Significant changes in manufacturing processes or number of products.
What is a major difficulty in implementing Activity-Based Costing in service industries?
A larger proportion of overhead costs are company-wide costs that cannot be directly traced to specific services.
