ACCT201 EXAM 2

Unit-Level

• Cost Driver varies with output volume (units); traditional variable costs

• EX: Cost of indirect materials for labeling each bottle of perfume (glue)

Batch-Level

• Cost driver varies with the number of product lines

• EX: Cost of setting up laser engraving equipment for each batch of key chains

Product-sustaining

• Cost driver varies with the number of product lines

• EX: Cost of inventory handling of different brands carried by Best Buy electronics store

Facility-sustaining

• Cost driver is necessary to operate the plant facility but does not vary with units, batches, or product lines

• EX: Cost of plant manager salary

Activity drivers

Factors that measure the consumption of activities by products and other cost objects

Unit level A.D.

Measure the consumption level of unit-level activities

Nonunit-level A.D

Factors that measure the consumption of nonunit-level activities by products and other cost objects; ie batch, product-sustaining, and facility-sustaining

Product diversity

• Means that products consume overhead activities in systematically different proportions

• This may occur for several reasons, including differences in: product size, product complexity, setup time, and size of batches

• The presence of product diversity is also necessary for product cost distortion to occur

Functional-based overhead costing stages

Two major stages:

1. Overhead costs are assigned to an organizational unit (plant or department)

2. Overhead costs are then assigned to cost objects

Activity-based costing stages

Two major stages:

1. Trace cost to activities

2. Trace activity cost to cost objects

Activity

An action taken or work performed by equipment or people for other people; identifying these is usually accomplished by interviewing managers or representatives of functional work areas (departments)

Resources

The cost of labor, energy, materials, and capital is found in the general ledger

Resource drivers

Factors that measure the consumption of resources by activities

Activity rate

• The means by which activity costs are assigned to products

• A rate for each activity can be calculated and used to assign overhead costs

Activity-based customer costing

• Customers are cost objects of fundamental interest

• Knowing how much it costs to service customers can be vital information for: Setting price, determining customer mix, and improving customer profitability

Supplier costing

Assigning the costs of supplier-related activities to suppliers follows the same pattern as ABC product and customer costing

Supplier-driven activities

• Purchasing, receiving, inspection of incoming components

• Reworking products (due to defective supplier components)

• Expediting products (due to late deliveries of supplies)

• Warranty work (due to defective supplier components)

Activity-based management

A system-wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and profit achieved

Process value analysis

Fundamental to activity-based management (ABM); focuses on cost reduction instead of cost assignment and emphasizes the maximization of system-wide performance

Activity analysis

The process of identifying, describing, and evaluating the activities; produces four outcomes

Activity analysis outcomes

1. What activities are done

2. How many people or machines perform the activities

3. The time and resources required to perform those activities

4. An assessment of the value of the activities to the organization, including a recommendation to select and keep any of those that add values

Value-added activities

Activities that are necessary to remain in business

1. The change of state was not achievable by prior activities

2. The activity produces a change of state

3. The activity enables other activities to be performed

Scheduling

Nonvalue-added activity that determines when different products have access to processes (or when and how many setups must be done) and how much will be produced

Moving

Nonvalue-added activity to move raw materials, WIP, and finished goods from one department to another

Storing

Nonvalue-added activity that uses time and resources while a good or raw material is held in inventory

Waiting

An activity in which raw materials or work in process by waiting on the next
process

Inspecting

An activity ensuring that the product meets specification

Activity elimination

Focuses on reducing cost on nonvalue-added items

Activity selection

Focuses on reducing cost by choosing among different sets of activities that are caused by competing strategies (lowest cost design)

Activity reduction

Focuses on reducing cost by reducing the time and resources required by an activity

Activity sharing

Reduces cost by increasing the efficiency of necessary activities by using economies of scale

Activity performance dimensions

• Quality

• Efficiency

• Time

Cycle time

Measures how long it takes to produce an output from the start to finish (from raw materials to finished goods)

Velocity

The number of units of output that can be produced in a given period of time; reciprocal of cycle time