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CIMA Official Terminology describes activity-based costing as an 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. The latter use cost drivers to attach activity costs to outputs. ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions. ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products. The activity-based costing process: What benefits does ABC provide?Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards. Questions to consider when implementing ABC
Related and similar practicesThank you for interesting in our services. We are a non-profit group that run this website to share documents. We need your help to maintenance this website. To keep our site running, we need your help to cover our server cost (about $400/m), a small donation will help us a lot. Please help us to share our service with your friends. Chapter 5Activity based costing provides managers with information that affects:bothfixed and variable costsSome manufacturing costs may be excluded from product costs when using: CHAPTER 7 SMARTBOOK:Question / StatementA "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a(n) ______.A characteristic essential for successful implementation of ABC is ______.A cost pool including costs to entertain clients and make sales calls is a(n) ______ activity.Activities that could be combined into one batch-level activity are the number of ______.Activity based costing provides managers with information that affects ______.Activity-based costing only charges products for the cost of the capacity used because ______.Activity-based costing uses activity rates to apply overhead costs to products in ______ stage allocation.Activity-based costing uses numerous ______ cost pools.An ABC system usually ______ a traditional cost system.An activity cost pool accumulates costs for ______ activity measure(s).An activity-based costing system ______.An activity-based costing system ______.An example of a duration driver is the ______.An example of a transaction driver is the ______.Compared to traditional systems, activity-based costing uses ______ cost pools and unique measures of activity.Costs assigned and/or traced when computing product margin in a traditional cost system are ______.Costs that can be easily traced to individual products include ______.Customer-level activities include ______.Employees may be asked to estimate their time spent dealing with cost pool activities so that ______.Identifying the activities that will form the foundation for the system ______.In ABC, the greater the number of activities, the ______.In activity-based costing, ______ are different from those calculated using traditional costing.In activity-based costing, first-stage allocations are usually based on the results of ______.In activity-based costing, nonmanufacturing and manufacturing costs are assigned to products on a(n) ______ basis.Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product. Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.
ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. The ABC calculation is as follows:
As an activity-based costing example, consider Company ABC that has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked, which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10. Activity-based costing benefits the costing process by expanding the number of cost pools that can be used to analyze overhead costs and by making indirect costs traceable to certain activities. The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects. Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders. There are two categories of activity measures: transaction drivers, which involves counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete. Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity. Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation, utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products. Which costs are assigned and/or traced to products in a traditional cost system?Allocation of Costs
Under traditional costing, overhead costs are assigned to products using a plant-wide, predetermined overhead rate. This rate, which is usually calculated at the beginning of the year, is determined by making estimates of total overhead costs and total activity.
How is overhead allocated in an ABC system?To calculate the per unit overhead costs under ABC, the costs assigned to each product are divided by the number of units produced.
How is overhead allocated in an ABC system quizlet?With an ABC overhead allocation method, overhead is allocated based on several different measures of activity, called cost drivers. One important result of using an ABC system is more accurate product costing.
Why are traditional volume based cost allocation systems likely to systematically distort product costs?Traditional volume-based cost allocation systems that use only drivers that vary directly with the volume of products produced—such as direct labor dollars, direct labor hours, or machine hours—are likely to systematically distort product costs because they break the link between the cause for the costs and the basis ...
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Traditional cost accounting systems assign overhead cost to outputs based on a ______.
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