Chapter 7 Costing A Tool to Aid Decision Making Flashcards

Understand activity-based costing and how it differs from a traditional costing system. Assign costs to cost pools using a first-stage allocation. Compute activity rates for cost pools. Assign costs to cost objects using a second-stage allocation. Use activity-based costing to compute product and customer margins. Prepare an action analysis report using activity-based costing data and interpret the report.

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Cards In This Set

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Activity-Based Costing Systems (ABC)
Quantify the increase in costs, such as procurement costs, material handling costs, and assembly costs that are caused by inefficient product designs and other factors.
Activity-Based Costing Systems (ABC) 2
A costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and there "fixed" as well variable costs.
  • Used as a supplement to, rather than a replacement for, a company's usual costing system.
  • Most organizations that use activity-based costing have 2 costing systems
    • Official costing system-- Used for preparing external financial reports.
    • Activity-based costing system-- Used for internal decision making and for managing activities
Activity-Based Costing versus Traditional Absorption Costing
  • Traditional absorption costing- designed to provide data for external financial reports.
  • Activity-based costing- designed to be used for internal decision making.
  • Activity-based differs in 3 ways:
  1. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis.
  2. Some manufacturing costs may be excluded from product costs.
  3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.
* Traditional Absorption-- Provide data for external financial reports and activity-based-- designed to be used for internal decision making.
Nonmanufacturing Costs and Activity-Based Costing
  • Traditional absorption- manufacturing costs are assigned to products and non manufacturing costs are not assigned to products.
    • Activity-based- many nonmanufacturing costs relate to selling, distributing, and servicing specific products. ABC includes both manufacturing and nonmanufacturing costs when calculating the entire cost of a product.
  • 2 types of nonmanufacturing costs ABC systems assign to products:
  1. Trace all direct nonmanufacturing costs to product.
    1. Ex.: sales commissions, shipping costs, and warranty repair costs.
  2. Allocate indirect manufacturing costs to products whenever the products have presumably caused the costs to be incurred.
* ABC product cost calculations include all direct costs that can be traced to products and all indirect costs that are caused by products.
Manufacturing Costs and Traditional Absorption Costing
  • Traditional absorption-- All manufacturing costs are assigned to products- even manufacturing costs that are not caused by the products.
    • Ex.: A predetermined plantwide overhead rate is computed by dividing all budgeted manufacturing overhead costs by a meausre of budgeted activity such as DLH. Spreads all manufacturing costs accross products based on each product's direct labor-hour usage.