Chapter 5: Activity-Based Costing (ABC) & Management (ABM)
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# Chapter 5: Activity-Based Costing & Management
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## Traditional vs. ABC Costing
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Flashcard 1
Q: What does a traditional volume-based costing system use?
A: A single cost driver (e.g., direct labor hours, machine hours).
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Flashcard 2
Q: How is overhead handled in traditional costing?
A: All overhead is combined into one plantwide cost pool with one predetermined overhead rate.
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Flashcard 3
Q: What is a weakness of traditional costing?
A: It can distort product costs when products are diverse.
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Flashcard 4
Q: What is Activity-Based Costing (ABC)?
A: A costing system that assigns overhead based on activities and their cost drivers.
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## ABC Two-Stage Process
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Flashcard 5
Q: What happens in Stage One of ABC?
A: Identify significant activities and assign overhead costs to activity cost pools.
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Flashcard 6
Q: What happens in Stage Two of ABC?
A: Identify cost drivers and allocate activity costs to products.
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Flashcard 7
Q: Why is ABC more accurate than traditional costing?
A: It assigns costs based on multiple activity drivers instead of one volume-based driver.
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## Activity Levels (Cost Hierarchy)
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Flashcard 8
Q: What are unit-level activities?
A: Activities performed for each unit produced.
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Flashcard 9
Q: What are batch-level activities?
A: Activities performed for each batch (e.g., machine setups).
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Flashcard 10
Q: What are product-sustaining activities?
A: Activities that support an entire product line (e.g., engineering design).
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Flashcard 11
Q: What are facility-level activities?
A: Activities required for overall production (e.g., rent, factory management).
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## Cost Distortion
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Flashcard 12
Q: When does cost distortion occur?
A: When non-unit-level costs are allocated using only unit-level drivers.
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Flashcard 13
Q: Why won’t a single cost driver work for diverse products?
A: Because products consume activities in different proportions.
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Flashcard 14
Q: Why might managers prefer traditional costing despite distortion?
A: It’s simpler, cheaper, and easier to explain.
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Flashcard 15
Q: What is a good rule for implementing ABC?
A: If overhead is a large portion of total cost, ABC is more beneficial.
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## Selecting Cost Drivers
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Flashcard 16
Q: What are the three criteria for selecting cost drivers?
A: Degree of correlation, cost of measurement, behavioral effects.
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Flashcard 17
Q: What does degree of correlation mean?
A: How closely the driver tracks the actual cost.
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Flashcard 18
Q: What does cost of measurement mean?
A: Whether the benefit of accuracy is worth the cost of collecting the data.
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Flashcard 19
Q: What are behavioral effects?
A: How the cost driver influences decision-maker behavior.
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Flashcard 20
Q: Why must managers balance accuracy and practicality?
A: Because more precision may cost more than it saves.
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## Collecting ABC Data
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Flashcard 21
Q: How is ABC data initially collected?
A: Interviews with employees and review of department records.
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Flashcard 22
Q: What is storyboarding?
A: Creating detailed process flowcharts to map activities.
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Flashcard 23
Q: Why use multidisciplinary ABC teams?
A: To gather insights from accounting, finance, operations, engineering, and marketing.
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# Activity-Based Management (ABM)
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Flashcard 24
Q: What is Activity-Based Management (ABM)?
A: Using ABC information to improve operations and decision-making.
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Flashcard 25
Q: What is the main goal of ABM?
A: Eliminate non-value-added activities.
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## Two-Dimensional ABC Model
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Flashcard 26
Q: What is the vertical view in ABC?
A: Cost assignment (resources → activities → cost objects).
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Flashcard 27
Q: What is the horizontal view in ABC?
A: Process improvement (root causes and performance evaluation).
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## Non-Value-Added Activities
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Flashcard 28
Q: What is a non-value-added activity?
A: An activity that can be eliminated without reducing product value.
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Flashcard 29
Q: Example of a non-value-added activity?
A: Rework of defective units.
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Flashcard 30
Q: What triggers rework?
A: Detection of defects during inspection.
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Flashcard 31
Q: What could be root causes of rework?
A: Incorrect specs, unreliable vendors, wrong parts, poor production.
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Flashcard 32
Q: What types of time are analyzed in process value analysis?
A: Inspection time, process time, move time, storage time, waiting time.
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## Customer Profitability Analysis
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Flashcard 33
Q: What is customer profitability analysis?
A: Using ABC to determine costs and profits associated with serving specific customers.
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Flashcard 34
Q: Why are some customers less profitable?
A: Frequent small orders, special packaging, fast delivery demands, frequent changes.
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Flashcard 35
Q: Are all sales equally profitable?
A: No — profitability often follows a logarithmic pattern.
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## ABC in Service Industry
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Flashcard 36
Q: Does ABC apply to service organizations?
A: Yes, using the same steps as manufacturing.
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Flashcard 37
Q: Examples of service industries using ABC?
A: Hospitals, banks, colleges.
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Flashcard 38
Q: Example cost drivers in hospitals?
A: Number of ER visits, surgeries, KPIs.
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## Exam Details (From Your Notes)
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Flashcard 39
Q: Exam window?
A: Monday 8:00am – Tuesday 6:15pm.
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Flashcard 40
Q: Exam format?
A: 25 questions, 70 minutes.
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# Big Concept Summary Card
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Flashcard 41
Q: Difference between ABC and ABM?
A:
* ABC = Better cost assignment
* ABM = Uses ABC data to improve operations
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If you'd like, I can next create:
A *50-question practice exam (mixed calculation + conceptual)**
A *calculation-focused ABC problem set**
A *one-page midterm cram sheet for Chapters 3, 5, and 6**
Or a *comparison table of Traditional vs ABC vs Process vs Job Order**