Chapter 17: Activity-Based Costing and Overhead Allocation

Vocabulary flashcards covering key terms and concepts from Chapter 17 on activity-based costing and overhead allocation methods.

Plantwide overhead rate method

Allocates all overhead costs using a single overhead rate applied to every product; base is usually direct labor hours or machine hours; rate = total budgeted overhead costs divided by the allocation base.

Allocation base

The metric used to assign overhead to products (e.g., direct labor hours, machine hours).

Product cost object

The unit or item (product) for which overhead costs are assigned.

Departmental overhead rate method

Allocates overhead using two or more rates, one per department; each department uses its own allocation base to apply overhead to products.

Activity-Based Costing (ABC)

Allocates overhead by identifying activities, grouping costs into cost pools, computing an overhead rate for each pool, and assigning costs to cost objects based on usage.

Activity cost pool

A group of costs related to performing a specific activity (e.g., setup, inspection, machining).

Activity driver (cost driver)

A factor that causes the cost of an activity to change (e.g., number of setups, number of batches, machine hours).

Cost object

Any item for which cost data is desired (product, service, or customer).

Budgeted overhead cost

Estimated total overhead cost assigned to an activity cost pool for the budgeting period.

Budgeted activity usage

Forecasted quantity of activity usage (e.g., hours, setups, batches) used to compute activity rates.

Unit-level activity

Activities performed for each unit produced (e.g., unit-level handling or processing).

Batch-level activity

Activities performed for a batch regardless of unit count (e.g., setups, inspections).

Product-level activity

Activities related to sustaining a product line (e.g., design, advertising).

Facility-level activity

Activities necessary for the overall operation of the plant (e.g., plant management, depreciation).

ABC for service providers

Applying ABC to service companies by classifying costs into activity levels: unit, batch, service, and facility.

Activity rate

Budgeted overhead cost for a pool divided by budgeted activity usage; used to apply overhead to cost objects.

Cost pool

An aggregation of costs associated with a single activity that feeds into ABC.

Product cost distortion

Distortion of product costs that can occur with simpler costing methods; a disadvantage cited for traditional methods compared to ABC.

Not GAAP compliant

A disadvantage of ABC; ABC is not always aligned with GAAP, while plantwide/departmental methods often are.

Customer profitability

Assessment of the profitability of each customer, often via a customer profitability report and a customer activity rate (budgeted support cost divided by budgeted base).