Ch. 4 ACC

These flashcards cover key terms and concepts related to Activity-Based Costing and its comparison with traditional costing methods.

Activity-Based Costing

A method that allocates overhead costs to multiple activity cost pools and assigns those costs to products or services based on individual cost drivers.

Traditional Costing

A method that allocates overhead using a single predetermined overhead rate, primarily based on either machine hours or direct labor.

Activity Cost Pool

Overhead cost attributed to a distinct activity.

Cost Driver

Any factor or activity that has a direct cause-effect relationship with the resources consumed.

Just-in-Time (JIT) Processing

An inventory strategy that strives to improve business return on investment by reducing in-process inventory and associated carrying costs.

Value-added Activities

Activities that increase the perceived value of a product or service to customers.

Non-value-added Activities

Activities that add costs or increase the time spent on a product/service without increasing its perceived value.

Overhead Cost Allocation

The process of distributing indirect costs to different products or services based on relevant drivers.

Two-Stage Process

A method in Activity-Based Costing where overhead costs are first assigned to activity cost pools and then allocated to products using cost drivers.

Unit-Level Activities

Activities performed for each unit of production, such as machine-related and labor-related tasks.

Batch-Level Activities

Activities performed every time a company produces another batch of a product.

Product-Level Activities

Activities performed every time a company produces a new type of product.

Facility-Level Activities

Activities required to support or sustain an entire production process.

Benefits of Activity-Based Costing

More accurate product costing, enhanced controls over overhead costs, and improved management decisions.

Limitations of Activity-Based Costing

Can be expensive to implement, more complex than traditional methods, and may still involve arbitrary allocations.

Predetermined Overhead Rate

A rate calculated before the accounting period begins; used to apply overhead costs to products.

Complex Manufacturing Processes

Processes that likely require multiple allocation bases due to variations in activities.