CHAPTER 7: ACTIVITY-BASED
COSTING- A TOOL TO AID DECISION-
MAKING
activity-based-costing---ans-✔✔Costing-method-that-first-assigns-costs-to-activities-and-
then-assigns-them-to-products-based-on-the-products'-consumption-of-activities.-
-High-level-of-complexity-&-high-#-of-cost-pools
-Based-on-activities-and-helps-give-managers-cost-information-for-strategic-and-other-
decisions-that-could-affect-capacity-and-therefore-fixed-and-variable-costs
is-activity-based-costing-used-as-a-supplement-to-or-a-replacement-of-a-firm's-normal-
costing-system?---ans-✔✔SUPPLEMENT-TO
is-ABC-designed-to-be-used-for-external-or-internal-decision-making?---ans-✔✔internal-
decision-making
list-3-ways-in-which-activity-based-costing-differs-from-traditional-absorption-costing---ans-
✔✔1.-non-manufacturing-+-manufacturing-costs-may-be-assigned-to-products,-but-ONLY-
on-a-cause-and-effect-basis-(traditional-absorption-costing-never-assigns-non-man-costs-
to-products)
2.-some-man.-costs-may-be-excluded-from-product-costs-(traditional-abs.-costing-
includes-all-man.-costs-in-cost-of-products)
3.-numerous-OH-cost-pools-are-used,-each-of-which-are-allocated-to-product-and-other-
cost-objects-using-their-own-unique-measure-of-activity
what-are-the-2-types-of-non-manufacturing-costs-included-in-product-cost-under-activity-
based-costing?---ans-✔✔1.-all-DIRECT-non-man-costs-are-traced-to-products-(like-
shipping-costs,-sales-commissions,-warranty-repair-costs)
2.-indirect-non-man-costs-are-traced-to-products-ONLY-IF-the-products-have-caused-the-
costs
, traditional-absorption-costing-applies-all-MOH-costs-to-products,-while-ABC-costing-
excludes-some-MOH-costs.-What-2-types-of-MOH-are-excluded?---ans-✔✔1.-
*organization-sustaining-costs*
--treated-as-period-costs-instead
2.-*unused/idle-capacity-costs*
-products-are-charged-only-for-the-capacity-they-use,-which-creates-more-stable-unit-
product-costs
Organization-sustaining-cost---ans-✔✔are-carried-out-regardless-of-which-customers-are-
served,-which-products-are-produced,-how-many-batches-are-run,-or-how-many-units-are-
made
ABC-defines-"overhead"-as-including-what?---ans-✔✔ALL-DIRECT-COSTS-(direct-
manufacturing-&-direct-non-manufacturing)
any-event-causing-the-consumption-of-overhead-resources-in-an-organization-is-
called....---ans-✔✔an-activity
activity-cost-pool---ans-✔✔A-"bucket"-where-costs-accumulate-that-relate-to-a-single-
activity-measure-in-an-activity-based-costing-system
activity-measure---ans-✔✔-An-allocation-base-in-an-activity-based-costing-system;-
ideally,-a-measure-of-the-amount-of-activity-that-drives-the-costs-in-an-activity-cost-pool.-
-2-types:-transaction-driver-&-duration-driver
**also-called-a-cost-driver!
what-are-the-2-types-of-activity-drivers?---ans-✔✔transaction-driver=-simple-count-of-the-#-
of-times-an-activity-occurs.-Usually-used-in-practice
duration-driver=-measure-of-the-amount-of-time-required-to-perform-an-activity.-More-
complex-to-measure-but-more-accurate
which-is-more-effort-to-calculate-and-has-a-higher-complexity:
transaction-driver-or-duration-driver?---ans-✔✔duration-driver
list-the-5-levels-of-activity-in-activity-based-costing---ans-✔✔1.-unit-level-activities
2.-batch-level-activities
3.-product-level-activities
4.-customer-level-activities
5.-org-sustaining-activities
Unit-level-activities---ans-✔✔activities-that-are-performed-each-time-a-unit-is-produced
COSTING- A TOOL TO AID DECISION-
MAKING
activity-based-costing---ans-✔✔Costing-method-that-first-assigns-costs-to-activities-and-
then-assigns-them-to-products-based-on-the-products'-consumption-of-activities.-
-High-level-of-complexity-&-high-#-of-cost-pools
-Based-on-activities-and-helps-give-managers-cost-information-for-strategic-and-other-
decisions-that-could-affect-capacity-and-therefore-fixed-and-variable-costs
is-activity-based-costing-used-as-a-supplement-to-or-a-replacement-of-a-firm's-normal-
costing-system?---ans-✔✔SUPPLEMENT-TO
is-ABC-designed-to-be-used-for-external-or-internal-decision-making?---ans-✔✔internal-
decision-making
list-3-ways-in-which-activity-based-costing-differs-from-traditional-absorption-costing---ans-
✔✔1.-non-manufacturing-+-manufacturing-costs-may-be-assigned-to-products,-but-ONLY-
on-a-cause-and-effect-basis-(traditional-absorption-costing-never-assigns-non-man-costs-
to-products)
2.-some-man.-costs-may-be-excluded-from-product-costs-(traditional-abs.-costing-
includes-all-man.-costs-in-cost-of-products)
3.-numerous-OH-cost-pools-are-used,-each-of-which-are-allocated-to-product-and-other-
cost-objects-using-their-own-unique-measure-of-activity
what-are-the-2-types-of-non-manufacturing-costs-included-in-product-cost-under-activity-
based-costing?---ans-✔✔1.-all-DIRECT-non-man-costs-are-traced-to-products-(like-
shipping-costs,-sales-commissions,-warranty-repair-costs)
2.-indirect-non-man-costs-are-traced-to-products-ONLY-IF-the-products-have-caused-the-
costs
, traditional-absorption-costing-applies-all-MOH-costs-to-products,-while-ABC-costing-
excludes-some-MOH-costs.-What-2-types-of-MOH-are-excluded?---ans-✔✔1.-
*organization-sustaining-costs*
--treated-as-period-costs-instead
2.-*unused/idle-capacity-costs*
-products-are-charged-only-for-the-capacity-they-use,-which-creates-more-stable-unit-
product-costs
Organization-sustaining-cost---ans-✔✔are-carried-out-regardless-of-which-customers-are-
served,-which-products-are-produced,-how-many-batches-are-run,-or-how-many-units-are-
made
ABC-defines-"overhead"-as-including-what?---ans-✔✔ALL-DIRECT-COSTS-(direct-
manufacturing-&-direct-non-manufacturing)
any-event-causing-the-consumption-of-overhead-resources-in-an-organization-is-
called....---ans-✔✔an-activity
activity-cost-pool---ans-✔✔A-"bucket"-where-costs-accumulate-that-relate-to-a-single-
activity-measure-in-an-activity-based-costing-system
activity-measure---ans-✔✔-An-allocation-base-in-an-activity-based-costing-system;-
ideally,-a-measure-of-the-amount-of-activity-that-drives-the-costs-in-an-activity-cost-pool.-
-2-types:-transaction-driver-&-duration-driver
**also-called-a-cost-driver!
what-are-the-2-types-of-activity-drivers?---ans-✔✔transaction-driver=-simple-count-of-the-#-
of-times-an-activity-occurs.-Usually-used-in-practice
duration-driver=-measure-of-the-amount-of-time-required-to-perform-an-activity.-More-
complex-to-measure-but-more-accurate
which-is-more-effort-to-calculate-and-has-a-higher-complexity:
transaction-driver-or-duration-driver?---ans-✔✔duration-driver
list-the-5-levels-of-activity-in-activity-based-costing---ans-✔✔1.-unit-level-activities
2.-batch-level-activities
3.-product-level-activities
4.-customer-level-activities
5.-org-sustaining-activities
Unit-level-activities---ans-✔✔activities-that-are-performed-each-time-a-unit-is-produced
