12.2 Activity-based costing (ABC)

Cards (48)

  • What is activity-based costing (ABC)?
    Method of allocating costs
  • ABC identifies cost drivers for each activity.
    True
  • ABC provides a more accurate cost allocation
  • What are the key activities in ABC?
    Purchasing, Production, Marketing, Customer Service
  • Increased machine hours directly increase production costs.

    True
  • Steps in assigning overhead costs in ABC:
    1️⃣ Identify activities and allocate costs
    2️⃣ Assign activity costs to products
  • Overhead costs are assigned to activities based on resource consumption.

    True
  • What is the formula for calculating the activity rate in ABC?
    \frac{\text{Total Cost of Activity}}{\text{Total Volume of Cost Driver}}</latex>
  • If the total cost for Machine Setup is $50,000 and there are 100 setups, the activity rate is $500 per setup
  • Activity-based costing recognizes that costs are directly related to volume.
    False
  • The formula for calculating the activity rate in ABC is: Total Cost of Activity
  • ABC recognizes that costs are directly related to volume.
    False
  • Match the activity with its cost driver:
    Purchasing ↔️ Number of orders
    Production ↔️ Machine hours
    Marketing ↔️ Advertising spend
    Customer Service ↔️ Number of service calls
  • What does the activity rate in ABC represent?
    Cost per unit of activity
  • What is the primary difference in cost drivers between ABC and traditional costing methods?
    Activity-based vs volume-based
  • What are the key benefits of using ABC compared to traditional costing methods?
    More accurate cost allocation and better decision-making
  • What type of data is required for accurate ABC?
    Reliable and detailed
  • Each marketing campaign contributes to marketing costs
  • Stages in allocating overhead costs in ABC:
    1️⃣ Identify activities and allocate costs
    2️⃣ Assign activity costs to products
  • Overhead costs are assigned to products based on their consumption of cost drivers.
    True
  • An example of identifying activities in ABC is Machine Setup
  • What is the formula for calculating the activity rate in ABC?
    Activity Rate=\text{Activity Rate} =Total Cost of ActivityTotal Volume of Cost Driver \frac{\text{Total Cost of Activity}}{\text{Total Volume of Cost Driver}}
  • The formula for calculating the activity rate in ABC is Total cost of activity divided by total volume of cost driver.
  • In ABC, the activity rate is calculated by dividing the total cost of an activity by the volume of its cost driver.

    True
  • In ABC, overhead costs are allocated to products in a two-stage process
  • Stages in allocating overhead costs in ABC
    1️⃣ Identify activities and allocate costs
    2️⃣ Assign activity costs to products
  • Activity costs in ABC are allocated to products based on their consumption of cost drivers.

    True
  • Why is ABC considered more accurate than traditional costing methods?
    Focuses on cost drivers
  • Traditional costing uses volume-based cost drivers, while ABC uses activity-based drivers.
  • Which costing method is more accurate for overhead cost allocation?
    ABC
  • ABC provides better insights for pricing, product mix, and profitability analysis compared to traditional costing.

    True
  • What is one benefit of using ABC for cost allocation?
    Improved cost accuracy
  • One limitation of ABC is that it is complex to implement
  • ABC enhances cost control by identifying cost drivers and areas for cost reduction.
    True
  • What is the primary focus of ABC?
    Activities drive costs
  • In ABC, overhead costs are assigned in a two-stage process
  • What is the second stage in assigning overhead costs in ABC?
    Assign activity costs
  • ABC provides a more accurate view of how different products utilize overhead resources compared to traditional methods.

    True
  • In the first stage of ABC, overhead costs are assigned based on resource consumption
  • What determines how activity costs are allocated to products in the second stage of ABC?
    Cost drivers