Process Costing and Activity-Based Costing (ABC)

Vocabulary flashcards covering key definitions, principles, formulas, and terminology from Process Costing and Activity-Based Costing (ABC).

Process Costing

A costing method that accumulates manufacturing costs by processes or departments, best applied when output is homogeneous and produced through continuous operations (such as oil refining).

Equivalent Units

A measure used in process costing to express partially completed units as an equivalent number of fully finished units, necessitated by the presence of incomplete units at the end of an accounting period.

Production Cost Report

A departmental summary whose main purpose is to report costs incurred, units accounted for, equivalent units, and cost per equivalent unit, while excluding non-manufacturing selling expenses.

Physical Flow of Units

The very first step performed when preparing a departmental production cost report in process costing.

Weighted-Average Method

A process costing method that combines costs and work from beginning inventory and the current period, calculating equivalent units using the formula: $\text{Units Completed} + (\text{Ending WIP} \times \%\text{ Completion})$.

FIFO Method

A process costing inventory assumption that treats the earliest costs incurred as the first ones to flow out of the process.

Conversion Costs

The combined total of direct labor and manufacturing overhead costs necessary to convert raw materials into finished products.

Ending Work in Process (WIP)

The partially completed inventory remaining at the end of a period in a department, consisting of all three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead.

Departmental Overhead Application

The practice in process costing of applying manufacturing overhead costs on a per-department basis rather than per job, customer, or contract.

Activity-Based Costing (ABC)

A costing methodology whose primary purpose is to assign overhead costs to products based on the specific activities that drive those costs, especially useful when products differ significantly in complexity and resource consumption.

Activity Cost Pool

The total overhead cost assigned to a single, specific activity within an organization.

Cost Driver

A measurable factor that causes or directly relates to the incurrence of a cost (for example, the number of purchase orders used to assign purchasing costs).

Activity Rate

The overhead rate per unit of cost driver, calculated by dividing the total activity cost pool by the total quantity of the cost driver (e.g., $\frac{\text{Activity Cost Pool}}{\text{Driver Quantity}}$).

Traditional Costing System

A conventional overhead allocation system that typically distributes overhead costs using a single volume-based measure, resulting in less accurate product costs than activity-based costing.

Primary Criticism of ABC

The major operational drawback that implementing and maintaining an activity-based costing system is costly and time-consuming compared to traditional methods.