Unit 4: Activity-Based Costing (ABC)

Question 1

Define Activity-Based Costing

Answer 1

Identify the multiple activities that drive overhead costs and allocate overhead based on those activities

Question 2

Using an ABC overhead allocation method, overhead is allocated based on several different measures of activity. What are these measures of activity called?

Answer 2

Cost drivers

Question 3

Define Unit Level Overhead

Answer 3

Routine overhead
-maintenance
-depreciation on machines
-electricity

The more production, the higher these costs

Question 4

Define Batch Level Overhead

Answer 4

Overhead cost created by stopping and starting
-Inspections
-Machine setups
-Movement of materials
-Accounting

If you have small production runs, this “batch overhead” cost goes up, even if the total amount produced stays the same.

Question 5

Define Product Line Overhead

Answer 5

Overhead costs caused by production complexity
-Product design
-Special storage
-Individual product managers
-Lots of accounting

Complex products create more overhead than do simple products.

Question 6

Define Facility Support Overhead

Answer 6

Overhead costs even when the factory is idle
-Property taxes
-Insurance
-Security
-Landscaping
-General accounting and administration
-Depreciation of the factory building

These overhead costs do not increase as the level of activity increases.

Question 7

Define Cost Drivers

Answer 7

A numerical measure that reflects the amount of an overhead cost caused by a particular activity.

Question 8

What type of overhead cost activities does not have a cost driver?

Answer 8

Facility Support Overhead - there are no particular activities that would affect these costs

Question 9

How is an ABC cost driver activity rate computed?

Answer 9

Cost pool total divided by the number of cost driver events