Accounting Final Exam - Ch.7/Appendix 2A: Activity-Based Costing

Two distortions with Absorption Costing

1.) High-volume products are overcosted

2.) Easy-to-produce products are overcosted

Activity-Based Costing

A costing method that assigns overhead costs to products based on the activities performed to make those products

Activity

An event that causes the consumption of overhead resources

Activity Cost Pool

A bucket in which costs are accumulated that relate to a single activity

Activity Rate

Used to assign costs from an activity cost pool to products

Five ABC categories

Unit-level, batch-level, product-level, customer-level, organization-sustaining activities

Unit-level Activities

Incurred for each unit produced

Cost drivers for unit-level

MHs, DLHs

Batch-level

Performed each time a batch is handled or processed, regardless of how many units

O

Batch Overhead Examples

Machine setups, cleaning, inspections

Batch Cost Driver Examples

# of batches, inspections, setups

Product-level activities

Incurred for specific products, regardless of how many units are produced or how many batches are run

Product Overhead Examples

Depreciation on specialized production, production equipment, parts administration, licensing fees, advertising, design fees, R & D

Product Cost Drivers

# of products

Customer-level

Incurred for specific customers

Customer Overhead examples

Customer support costs (sales reps), catalogs, rewards programs

Customer Cost Driver Examples

# of customers

Organization-Sustaining Activities

Basic infrastructure resources not related to any specific units, batches, products, or customers

OS Overhead Examples

Legal/HR, admin salaries, rent, factory, Corporate HQ

OS Cost Driver Examples

None