Activity-Based Costing 4-3
CHAPTER STUDY OBJECTIVES
Recognize the difference between traditional costing and activity-based costing.
Atraditional costing system allocates unit-based overhead to products on the basis of predetermined plantwide or department-wide volume of unit-based output rates such asdirect labor or machine hours. An ABC system allocates overhead to identified activity costpools, and costs are then assigned to products using related cost drivers that measure theactivities (resources) consumed.2.
Identify the steps in the development of an activity-based costing system.
Thedevelopment of an activity-based costing system involves four steps: (1) Identify and classifythe major activities that pertain to the manufacture of specific products and allocateoverhead costs to the appropriate cost pools. (2) Identify the cost driver that has a strongcorrelation to the costs accumulated in the activity cost pool. (3) Compute the activity-basedoverhead rate per cost driver. (4) Assign overhead costs for each activity cost pool toproducts or services using the cost drivers.3.
Know how companies identify the activity cost pools used in activity-based costing.
To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction.4.
Know how companies identify and use the activity cost drivers in activity-based costing.
Cost drivers identified for assigning activity cost pools must (a) accurately measurethe actual consumption of the activity by the various products, and (b) have related dataeasily available.5.
Understand the benefits and limitations of activity-based costing.
What makes ABC amore accurate product costing system is: (1) the increased number of cost pools used toassign overhead, (2) the enhanced control over overhead costs, and (3) the better management decisions. The limitations of ABC are: (1) the higher analysis andmeasurement costs that accompany multiple activity centers and cost drivers, and (2) thenecessity still to allocate some costs arbitrarily.6.
Differentiate between value-added and nonvalue-added activities.
Value-added activitiesincrease the worth of a product or service. Nonvalue-added activities simply add cost to, or increase the time spent on, a product or service without increasing its market value. Awareness of these classifications encourages managers to reduce or eliminate the timespent on the nonvalue-added activities.7.
Understand the value of using activity levels in activity-based costing.
Activities maybe classified as unit-level, batch-level, product-level, and facility-level. Unit-, batch-, product-, and facility-level overhead costs are controlled by modifying unit-, batch-, product-, andfacility-level activities, respectively. Failure to recognize this hierarchy of levels can result indistorted product costing.8.
Apply activity-based costing to service industries.
The overall objective of using ABC inservice industries is no different than for manufacturing industries, that is, improved costingof services provided (by job, service, contract, or customer). The general approach tocosting is the same: analyze operations, identify activities, accumulate overhead costs byactivity cost pools, and identify and use cost drivers to assign the cost pools to the services.*9.
Explain just-in-time (JIT) processing.
JIT is a processing system that is dedicated tohaving on hand the right products at the time they are needed, thereby reducing the amountof inventory and the time inventory is held. One of the principal accounting effects is thatone account, Raw and In-Process Inventory, replaces both the raw materials and work-in-process inventory accounts.