Other

ACC7313_450 Accounting Concepts II/ Activity-Based Costing (ABC) notes questions and answers

5 views 0 purchase

Course
Activity-Based Costing

Institution
Algonquin College

[Show more]

Preview 2 out of 10 pages

View example

Uploaded on May 18, 2022
Number of pages 10
Written in 2021/2022
Type Other
Person Unknown

activity based costing abc
acc7313450 accounting concepts ii

Classroom Member since 2 year 3758 documents sold

490

166

162

CA$25.92

Add to cart

Add to wishlist

100% satisfaction guarantee
Immediately available after payment
Both online and in PDF
No strings attached

Activity-Based Costing (ABC)

Activity-based costing is a technique that uses an allocation base to assign
overhead costs more accurately to products than the plant-wide and
departmental approaches.

The basic idea of ABC is:

 A customer order would trigger a number of activities;

 The performance of these activities consumes resources;

 The consumption of these resources incurs costs to the company.

Here is a quick recap with respect to assigning overhead costs:

In other courses you might have been introduced to the development of a single overhead rate for the entire plant and/or
speci c overhead rates that are applicable only to one department.

The plant-wide overhead rate is a simple method that uses the same overhead cost rate throughout the entire factory. In most
cases, direct labour is the allocation base for this rate. However, as manufacturing processes become more automated, requiring
less labour to complete the manufacturing process, this may not be an appropriate allocation base.

Departmental overhead rates are allocated on different bases depending on the nature of the work in the department. For
example, in the assembly area the basis for allocation may be the number of labour hours but in the fabricating department the
most logical basis might be machine-hours.

It is important that you recognize that the department rates may not correctly assign overhead costs when a company has a
range of products. The biggest risk that is encountered with traditional costing methods is that they tend to allocate indirect
costs without regard to the use of resources. In fact, cross-subsidization can arise when some products are allocated less than
their fair share of the total indirect costs. This occurs when costs are incorrectly allocated, forcing the sale price of some
products to cover more than the actual cost for that product due to the overhead costs assigned to this product being too high.
ABC helps to prevent this cross-subsidization.

Key Terminology

To help you going forward, here is some important terms and the de nitions that this course uses.

Activity

An activity, in activity-based costing, is an event that causes the consumption of overhead resources. Examples of
activities include: setting up machines; admitting patients to a hospital; billing customers; or opening an account at a bank.

Activity Cost Pool

, An activity cost pool is a “cost bucket” in which costs related to a speci c activity are captured. The result will be that each
activity will have its own rate to be used when allocating overhead costs.

Activity Measure

An activity measure expresses how much of an activity is carried out. It is this number that is used as the allocation base
for applying overhead to products and services. Activity measures can be related to volume or not related to volume.

Activity Rate

An activity rate is the predetermined overhead rate in an activity-based costing system.

Taking each activity in isolation, this system works exactly like the job-order costing system in that a predetermined overhead
rate is computed for each activity and then applied to jobs and products based on the amount of activity consumed by the job or
product.

Activity-based costing usually does not replace traditional costing methods like job costing or process costing. Instead, ABC
recognizes that the activities within a company vary and that each activity typically has a different driver that affects costs.

Example:

The following is an example where activity based costing could be used to provide insights into the indirect costs and the pro t
for each product line.

A company called Bathtubs Unlimited manufactures and sells bath tubs. In order to demonstrate ABC, the company
manufactures two types of bath tubs, either a standard bathtub or a custom bathtub. The income statement for the current year
is presented below and as you can see the company is losing money.

The senior of cials of the company are puzzled. Why are we losing money.

Income Statement Total Custom Standard

Sales $3,000,000 $450,000 2,550,000

Cost of Goods Sold

Direct Materials 566,000 90,000 476,000

Direct Labour 753,750 141,750 612,000

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller Classroom. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for CA$25.92. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

56326 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling

Other

ACC7313_450 Accounting Concepts II/ Activity-Based Costing (ABC) notes questions and answers

Document information

Subjects

Written for

Seller

Reviews received

Content preview