Chapter 5: Activity-based costing and customer profitability analysis

Question 1

What is an activity?

Answer 1

specific task, action or unit of work done

Question 2

What is a resource?

Answer 2

economic element needed or consumed to perform activities

Question 3

What is a cost driver?

Answer 3

factor that causes or relates to a change in total cost of an activity

Question 4

What is a resource consumption cost driver?

Answer 4

measure of the frequence and intensity demand placed on a resource by an activity

Question 5

What is an activity consumption cost driver?

Answer 5

a measure of demand placed on resources by products, services or customers

Question 6

What is activity-based costing?

Answer 6

costing approach that assigns resource costs to cost objects based on activities performed for cost objects

Question 7

What is a two-stage cost assignment?

Answer 7

procedure that assigns a firm’s resource costs to cost pools and then to cost objects.

Question 8

What is the difference betwee volume-based and activity-based two-stage procedures?

Answer 8

Volume-based two-stage procedure: Indirect costs are first allocated to the plant or departments in the plant (cost pools), then to cost objects

Activity-based two-stage procedures: Indirect costs are first allocated to activities in the plant (cost pools), and then to cost objects

Question 9

Name three steps in developing an activity-based costing system?

Answer 9

1. Identify resources and costs
2. Assign resource costs to activities
3. Assign activity costs to cost objects based on appropriate acitivity consumption cost drivers

Question 10

What are the different levels of activity?

Answer 10

• Unit-level activity
• Batch-level activity
• Product-level activity
• Facility-levle activity

Question 11

What is unit-level activity?

Answer 11

activity performed at each unit of the cost object. These activities tend to volume-based. Resource consumptions driver and activity consumption driver are likely to be the same for unit-level

Question 11

What is batch-level activity?

Answer 11

an activity performed to support the production of a specific type of production or service, such as setting up machines, batch inspection etc.

Question 12

What is product-level activity?

Answer 12

activity performed to support production of a specific type of product or service, such as product design, purchasing parts required for the product etc.

Question 13

What is facility-level activity?

Answer 13

• Facility-level activity: activity performed to support operations in general, not caused by products or services, such as plant security, maintenance of general-purpose machines etc.

Question 14

Name 5 benefits of activity-based costing?

Answer 14

1. Better profitability measures  more accurate and informative product costs
2. Better decision making  more accurate measurements improve product and process value by making better product decisions
3. Process improvement  ABC provides necessary information for process improvement
4. Improved planning  Improved product costs lead to better estimates of costs for budgeting and planning
5. Identification of the cost of unused capacity  ABC costing provides better information to identify cost of unused capacity and maintain separate accounting for this cost.

Question 15

What is idle capacity?

Answer 15

difference between available capacity and the planned level of utilization

Question 16

What is the difference between operational and strateig Activity-based management?

Answer 16

• Operational ABM: enhances operational efficiency and asset utilization. Focus is on doing things right and performing activities more efficiently
• Strategic ABM: focuses on choosing appropriate activities for the operation, eliminating nonessential activities, etc.

Question 17

What is idle capacity cost?

Answer 17

economic value of resources not utilized to produce products or provide services.

Question 18

What is activity-based management?

Answer 18

uses activity analysis and activity-based costing to help managers identify the value of activities and to make strategic performance management decisions – adding and deleting products, adjust process capacities and adjusting prices, removing costs and complexities and more, in order to increase the firm’s competitiveness and profitability.

Question 19

What is a process map?

Answer 19

• High-value added activity: something the customer thinks adds value to the product or service
• Low-value added activity: consumes time, resources or space but adds little in regard to satisfying customer needs

Question 20

What is a customer profitability analysis?

Answer 20

identifies customer service activities, cost drivers, and the profitability of each individual customer or customer group

Question 21

What can a customer profitability analysis help with?

Answer 21

• Identify most profitable customers
• Manage each customer’s cost-to-serve
• Introduce profitable new products and services
• Discontinue unprofitable offerings

Question 22

What is a customer cost analysis?

Answer 22

identifies cost activities and cost drivers related to serving customers.

Question 23

What are the five different cost categories of a customer cost analysis?

Answer 23

1. Customer unit level cost
2. Customer batch-level cost
3. Customer sustaining cost
4. Distribution channel cost
5. Sales-sustaining cost

Question 24

What is customer unit-level cost?

Answer 24

resource consumed for each unit sold to customer

Question 25

what is a customer batch-level cost?

Answer 25

resources consumed for each sales transaction

Question 26

What is customer lifetime value?

Answer 26

net present value of estimated future profits from a customer

Question 26

What is multistage activity-based costing?

Answer 26

assignment of resource costs to certain activities that are then assigned to other activities before being assigned to final cost objects. Usually, support activities as assigned to other activities.

Question 26

what is a customer sustaining cost?

Answer 26

resources consumed to service customer regardless of number o units or batches sold (salesperson travel costs, monthly statement processing costs

Question 27

What is distribution- channel cost?

Answer 27

resources consumed in each distribution channel firm uses, such as regional warehouses

Question 28

What is sales-sustaining costs?

Answer 28

resources consumed to sustain sales and service activities not to be traced to individual unit

Question 29

What is resource consumption accounting?

Answer 29

management accounting approach that provides management with decision support information based on operational view of organization

Question 30

What is time-driven activity-based costing?

Answer 30

assignment of resources costs directly to cost objects using cost per time unit of supplying resource, rather than first assigning costs to activities and then from activities to cost objects. Used when substantial amount of the cost are in a highly repetitive process.