12.2 Activity-based costing (ABC)

• 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?

  $\text{Activity Rate} =$$\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