Unit 3 Flashcards
Activity-based costing (ABC)
the objective is to give better understanding of overhead and the profitability of products and customers.
traditional cost accounting systems
The objective is to properly value inventories and cost of goods sold for external financial reports.
Characteristics of Traditional costing system
more simplistic and less accurate
assigns overhead costs to products based on predetermined overhead rate
treat overhead costs as a single pool of indirect costs
optimal when indirect costs are low compared to direct costs.
only manufacturing costs are assigned to products.
costs of idle capacity are charged to products.
Characteristics of ABC system
more complex and more accurate
assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities
provide a more precise breakdown of indirect costs
more costly to implement
non-manufacturing and manufacturing costs are assigned to products
costs of idle capacity are
not charged to products.
Major differences
Non-manufacturing as well as manufacturing costs may be assigned to products.
Some manufacturing costs may be excluded from product costs.
There are a number of overhead cost pools.
The allocation bases often differ from those used in traditional costing systems.
The overhead rates, or activity rates, may be based on the level of activity at capacity rather than on the budgeted level of activity.
Plantwide rates
use direct labour as the overhead allocation base
Departmental overhead rates
A two-stage process is necessary because costs are allocated to departments and then to products
Activity
any event that causes the consumption of overhead resources.
Designing an ABC System
Identify and define activities and activity pools
Where possible, trace costs to activities and cost objects.
Assign costs to activity cost pools
Calculate activity rates
Assign costs to cost objects
Identifying activities levels
Unit-level
batch-level
product-level
customer-level
organizational-sustaining activities
Unit-level activities
performed each time a unit is produced
For example, providing power to run processing equipment
Batch-level activities
performed each time a batch is handled or processed, regardless of how many units are in the batch.
For example, placing purchase orders
Product-level activities
specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold.
For example, activities such as designing a product, and advertising
Customer-level activities
specific customers and include activities such as sales calls
Organization-sustaining activities
carried out regardless of which customers are served, which products are produced, how many batches are run or how many units are made.
For example, cleaning executive offices
