Activity-Based Costing and Managerial Accounting Vocabulary

Flashcards covering core terminology and foundational concepts of Activity-Based Costing (ABC) versus traditional costing methods.

Activity

An event, action, transaction, or work sequence that causes cost while producing a product or performing a service.

Activity Cost Pool

A group of activities that are very similar in relating to a particular activity.

Cost Driver

A factor, such as machine hours or number of setups, that drives or causes the cost accumulated in an activity cost pool.

Activity-Based Costing (ABC method)

A costing method that allocates overhead cost to activity cost pools and assigns these pools to products or services using cost drivers.

Traditional Costing Method

A costing method that allocates all factory overhead using a single plantwide predetermined overhead rate (POR) based on a single driver such as direct labor hours or machine hours.

Step 1 of ABC Method

Identify and classify activities and assign overhead costs to activity cost pools.

Step 2 of ABC Method

Identify the cost driver that has a strong relationship to the cost accumulated in each activity cost pool.

Step 3 of ABC Method

Compute the activity-based overhead rate for each cost pool using estimated overhead divided by expected use of the cost driver.

Step 4 of ABC Method

Assign overhead costs to products by multiplying the actual use of the cost driver by the activity-based overhead rate for each pool.

Activity-Based Overhead Rate Formula

$$\text{Activity-Based Overhead Rate} = \frac{\text{Estimated Overhead for the Activity}}{\text{Expected Use of Cost Driver per Activity}}$$