• Activity An event that causes the consumption of overhead resources in an organization. (p. 230)
• Activity-based costing (ABC) A costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs. (p. 227)
• Activity-based management (ABM) A management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects. (p. 249)
• Activity cost pool A “bucket” in which costs are accumulated that relate to a single activity measure in an activity-based costing system. (p. 230)
• Activity measure An allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool. (p. 230)
• Batch-level activities Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch. (p. 230)
• Benchmarking A systematic approach to identifying the activities with the greatest potential for improvement. (p. 249)
• Customer-level activities Activities that are carried out to support customers, but that are not related to any specific product. (p. 230)
• Duration driver A measure of the amount of time required to perform an activity. (p. 230)
• First-stage allocation The process by which overhead costs are assigned to activity cost pools in an activity-based costing system. (p. 235)
• Organization-sustaining activities Activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. (p. 230)
• Product-level activities Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. (p. 230)
• Second-stage allocation The process by which activity rates are used to apply costs to products and customers in activity-based costing. (p. 239)
• Transaction driver A simple count of the number of times an activity occurs. (p. 230)
• Unit-level activities Activities that are performed each time a unit is produced. (p. 230)

Questions:

5–1 In what fundamental ways does activity-based costing differ from traditional costing methods such as job-order costing as described in Chapter 3?

5–2 Why is direct labor a poor base for allocating overhead in many companies?

5–3 Why are top management support and cross-functional involvement crucial when attempting to implement an activity-based costing system?

5–4 What are unit-level, batch-level, product-level, customer-level, and organization-sustaining activities?

5–5 What types of costs should not be assigned to products in an activity-based costing system?

5–6 What are the two stages of allocation in activity-based costing?

5–7 Why is the first stage of the allocation process in activity-based costing often based on interviews?

5–8 When activity-based costing is used, why do manufacturing overhead costs often shift from high-volume products to low-volume products?

5–9 How can the activity rates (i.e., cost per activity) for the various activities be used to target process improvements?

5–10 Why is the form of activity-based costing described in this chapter unacceptable for external financial reports?

Answer rating: 100% (QA)

question 51 answer Activitybased costing ABC assigns overhead and indirect costssuch as salaries and utilities to products and services The ABC system of cost accounting is based on activities which a... View the full answer