Ch7 - Activity Based Costing (ABC) ABC is a costing method designed to provide managers with cost information for strategic and other decisions that potentially affect____________, and therefore, "fixed" as well as variable costs. It is ordinarily used as a______________to, rather than as a replacement for, the company's usual costing system. How Costs are Treated in ABC In ABC,____________________ as well as ______________costsmay be assigned to products, but only on a cause-and-effect basis. ABC _____________ organization-sustaining costs and idle capacity costs from product cost. ABC systems can assign sales commissions, shipping costs, and warranty repair costs to specific products. ABC differs from traditional cost accounting because numerous overhead cost pools are used. 1
How Costs are Treated Under Activity-Based Costing Each ABC cost pool has its ownunique measure of activity, while traditional cost systems usually rely ondirect labor hoursand/ormachine hoursto allocate all overhead costs to products. oDirect labor and machine hours work correctly when changes in the quantity of the base are_______________with changes in the overhead costs being assigned using the base. oRelying exclusively on direct labor hours and/or machine hours to assign overhead costs to products has come under increased scrutiny since, on an economy-wide basis, direct labor and overhead costs have been moving in____________directions and the variety of products produced by companies has increased. Key Definitions and Concepts Activity= An event that causes the consumption of overhead resources. Activity______________= A "cost bucket" in which costs related to a single activity measure are accumulated. Activity Measure= An allocation base in an activity-based costing system. Also known as a _____________.Two Common Types of Activity Measures: 1.Transaction Driver = Simple count of the number of times an activity occurs. 2._____________ Driver = A measure of the amount of time needed for an activity. 2
The Four Steps for Implementing ABC 1.Define Activities, Activity Cost Pools, and Activity Measures. 2.Assign Overhead Costs to Activity Cost Pools. 3.Calculate Activity Rates 4.Assigning Overhead to Products/Cost Objects
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