Accounting & auditingLesson 3 of 5 in the course Managerial and cost accounting

Activity-Based Costing: Cost Flows, Drivers, and Management Use

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Activity-based costing (ABC) offers a way to understand how organizational activities consume resources and how products or services use those activities. It matters because inaccurate overhead allocation can hide the true cost and profitability of different outputs.

Activity-based costing identifies the activities an organization performs, calculates the costs of those activities, and assigns the costs to products, services, or other cost objects according to their consumption of the activities.

All flashcards

What is activity-based costing?
A costing method that identifies activities, calculates their costs, and assigns those costs to products, services, or other cost objects according to activity consumption.
What is a cost object?
An item or entity for which costs are measured, such as a product, service, customer, or department.
Why can traditional broad overhead allocation be misleading?
It may treat products as though they use shared resources equally even when their actual consumption differs, distorting product costs and profitability.
What does cross-subsidization mean in product costing?
It occurs when inaccurate cost allocation makes one product's cost too low and another product's cost too high, effectively shifting costs between them.
Name two types of decisions that ABC can support.
ABC can support product or service pricing and portfolio decisions, as well as outsourcing and process-improvement decisions.

Quiz questions

  1. What is a cost object in accounting?Answer: Anything for which an organization wants to measure costs.
  2. For costs associated with operating machinery, which measure is identified as a suitable cost driver?Answer: Machine hours used by the products.
  3. Why should managers distinguish allocated cost from avoidable cost when considering whether to discontinue a product?Answer: An allocated fixed cost may remain even if the product is discontinued.
  4. When was activity-based costing developed and formalized in the United States?Answer: During the 1970s and 1980s.
  5. Which approach is described as an alternative to complex, manually driven ABC systems?Answer: Lean accounting.

Based on the Wikipedia article Activity-based costing, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.

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