What does activity-based costing (ABC) focus on?
focuses on activities performed to produce a product
The first step in the development of an activity-based costing system is
identify and classify activities overhead to cost pools
Which of the following would be the best cost driver for the assembling cost pool?
Number of Parts
A frequently cited limitation of activity-based costing is
certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours
Shaping a piece of metal on a lathe
value-added
floor space
facility-level
Primary Benefit of ABC
more accurate product costing, ABC leads to enhance control over overhead costs, abc leads to better management decisions
How many stages does Traditional costing system have?
One
The reason behind ABC cost allocation is
Product consume activities and activities consume resources
A traditional costing system allocates overhead by means of multiple overhead rates
False
Direct material and direct labor costs are easier to trace to products than overhead
True
As manufacturing processes have become more automated, more companies have chosen to allocate overhead on the on the basis of direct labor costs
False
In activity-based costing, an activity is any even, action, transaction, or work sequence that incurs cost when producing a product
True
Four Steps to calculate unit costs under ABC
Identify and classify activities and allocate. Identify Cost Driver. Compute Overhead. Assign Overhead.
Activity cost pool is
the overhead cost attributed to a distinct type of activity.
a cost driver is
any factor or activity that has a direct cause-effect relationship with the resources consumed
How does a company know when to use ABC?
1) product lines differ greatly in volume and manufacturing complexity
2) product lines are numerous and verse, and they require differing degrees of support services
3)the manufacturing process or the number of products has changed significantly for exam
value added activities increase
the worth of a product or service to customers.
non-value added activities are production or related activities that simply
add cost to or increase the time spent on a product or service without increasing its market value
ordering supplies
Non-Value added
Taking appointments
Non-Value added
Completing continuing education requirements
Value-added
Explaining dental-hygiene techniques to patients
Value-added
Completing insurance Documents
Non-Value added
Examining patients
Value-added
Failure to recognize this classification of activities is one of the reasons that
volume based cost allocation causes distortions in product costing
What sometimes makes implementation of activity-based costing difficult in service industries is that a larger proportion of overhead costs
that cannot be directly traced to specific services provided by the company
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (a) engineering design
product-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (b) machine setup
batch-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (c) toy design
product-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level:(d) plant cafeteria
facility-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (e) inspections after each setup
batch-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (f) polishing parts
unit-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level:(g) assembling parts
unit-level
Classify each of the following activities as either unit-level, batch-level, product-level, or facility-level: (h) health and safety.
facility-level