Chapter 2

Question 1

ABC

Definition

Answer 1

A costing system that is designed to help spread overheads costs amongst the products that are made so that reasonable selling prices, inventory valuations etc can be established

Approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.

Question 2

Cost driver

Answer 2

A factor influencing the level of the cost.

Often use in the context of ABC to denote the factor which links activity resource consumption to product outputs, for example, the number of purchase orders will be a cost driver for procurement cost.

Question 3

Cost pool

Answer 3

Grouping of costs relating to a particular activity in an activity based costing system

Question 4

Hierarchy of activities

Answer 4

Classification of activities by level of organisation, for example, units, batch product sustaining, and facility sustaining 

Question 5

The four steps involved in calculating overhead cost per unit

Answer 5

Step, one - idolise overhead costs, into cost pools
Step two – establish cost driver basis for each cost pool
Step, three - workout, the O.A.R. for each cost driver
Step four – use the O.A.R. calculated to absorb costs from each cost pool into cost units

Question 6

Product level

Driver and examples

Answer 6

Production volume

Number of units

Example Machine power

Usually direct costs

Question 7

Batch level

Drivers and examples

Answer 7

Number of batches

Example, set up costs, quality control

Are usually ABC costs

Question 8

Product sustaining

Examples and drivers

Answer 8

Number and diversity of products.

Example, product management, e.g. marketing and design.

Question 9

Facility, sustaining

Drivers and examples

Answer 9

The fact that the business exists

Examples, rent and rates

Question 10

Logistical

Categories of activity

Answer 10

Moving people or inventory

Question 11

Balancing

Categories of activities

Answer 11

Ensuring availability of resources (better planning)

Question 12

Quality

Categories of activity

Answer 12

Meeting internal standards and customer requirements

Where to invest

Question 13

Change

Categories of activity in cost drivers

Answer 13

Dealing with internal and external changes, such as product, design, or customer tastes

Question 14

Transaction

Cost drivers

Answer 14

Number of times action happens

Question 15

Duration

Cost drivers

Answer 15

How long action takes

Question 16

Intensity

Cost drivers

Answer 16

Amount of resources used

Question 17

Advantages of ABC

Answer 17

Assesses costs of individual activities based on their use of resources

Enables accurate costing of all activities to be obtained throughout an organisation.

Easy to identify where high (and low) costs are being incurred and the cause. Makes visible waste and non-value-added activities.

A Valuable tool for both business and process improvement. Encouraging continuous improvement and total quality control because planning and control are directed a process level .

Helps with future product planning e.g. the cost of all activities associated with a product or service can be accurately determined before it is launched. This can help with determining pricing associated expenditure

Enables fair assessment of performance by giving a better insight into controllable and uncontrollable costs. 

Question 18

Disadvantages of ABC

Answer 18

It may be difficult to set up and establish, particularly if an organisation is using more traditional accounting methods (barriers to change).

Can be time consuming if all activities are to be costed.

May provide too much detail obscuring the bigger picture.