Iii.c. Activity-Based Costing (Abc)/joint Product Costing

Front 1

Define ABC.

Back 1

ABC refines traditional costing methods & assumes that the resource-consuming activities (tasks, units of work) with specific purposes cause costs.

Front 2

Define Activity.

Back 2

any work performed inside a firm

Front 3

Define Resource.

Back 3

an element that is used to perform (or applied to perform) an activity

Front 4

Define Cost Drivers.

Back 4

• a factor that has the ability to change total costs
• often used as allocation bases for applying overhead costs to cost objects

Front 5

Define Resource Cost Driver.

Back 5

the amount of resources that will be used by an activity

Front 6

Define Activity Cost Driver.

Back 6

the amount of activity that a cost object will use, and it is used to assign the costs to the cost object

Front 7

Define Activity Centers.

Back 7

an operation necessary to produce a product is an activity cener

Front 8

Define Cost Pool.

Back 8

a group of costs (raw materials, DL) or a specially identified cost center (a department, a manager) in which costs are grouped, assigned, or collected

Front 9

What are the 5 characteristics of ABC?

Back 9

1) ABC can be part of a job-order system (unique) or a process cost system (mass).

2) ABC can be used for manufacturing or service businesses.

3) ABC takes a long-term viewpoint & treats production costs as variable.

4) The cost driver is often a non-financial measure.

5) ABC may be used for internal but not for external purposes.

Front 10

Define Value-Chain.

Back 10

a series of activities in which customer usefulness is added to the product

Front 11

Define Non-Value-Added Activities.

Back 11

do not increase product value or service and are targeted for elimination

Front 12

What is another name for ABC?

Back 12

• "Transaction-Based Costing"
• this is because the cost driver is typically the # of transactions involved in a particular activity

Front 13

What are the 6 basic steps of ABC?

Back 13

1) Analysis of Cost Drivers

2) Accumulate the Costs in Cost Pools

3) Trace Indirect Costs to Activity Centers

4) Allocate Remaining Indirect Cost Pools

5) Divide Assigned Costs by Level of Activity for the Cost Center

6) Cost the Product

Front 14

What is the advantage of ABC?

Back 14

• an ABC system will apply high amounts of OH to a product that places high demands on expensive resources
• if a product places few demands on expensive resources, the system will assign little of that cost to the product
• this removes much of the cost distortion caused by traditional OH systems.

Front 15

What are the 2 methods of Service Costs Allocation using ABC?

Back 15

1) Direct Method

2) Step-Down Method

Front 16

What is Direct Method?

Back 16

• most widely used (and least complex) method to allocate service costs
• each service department's total costs are directly allocated to the production departments without recognizing that service departments themselves may use the services from other service departments

Front 17

What is the Step-Down Method?

Back 17

• more sophisticated approach to allocate service costs
• service department costs are also allocated to other service departments as well as production departments

Front 18

What is Joint Product Costing?

Back 18

allocating the cost of a single process (joint costs) among several final products (or byproducts) if two or more final products are produced from the same raw material (ex - cow)

Front 19

Define Joint Products.

Back 19

• "main products"
• two or more products that are generated from a common input

Front 20

Define By-Products.

Back 20

minor products of relatively small value that incidentally result from the manufacture of the main product

Front 21

Define Split-Off Point.

Back 21

that point in the production process where the joint products can be recognized as individual products

Front 22

Define Joint Product Costs (joint costs).

Back 22

costs incurred in producing products up to the split-off point

Front 23

Define Separable Costs.

Back 23

costs incurred on a product after the split-off point

Front 24

What are the 3 methods of allocating common costs to Joint Products?

Back 24

1) Allocation by Unit Volume Relationships

2) Relative Net Realizable Values at Split-Off Point

3) Service Departments Cost Allocation to Joint Products