ABC vs. Traditional Costing
This costing system uses a single predetermined overhead rate to allocate overhead.
What is traditional costing?
Any event, action, or transaction that incurs costs when producing a product or service.
What is an activity?
Step 1 of ABC involves identifying and classifying activities and assigning costs to these.
What are activity cost pools?
Atlas Company has this many activity cost pools in the ABC example.
What is four?
One key benefit of ABC is more accurate product costing due to this feature.
What are multiple cost pools?
The overall objective of ABC in service companies is to identify activities that generate this.
What are costs?
Under job order costing, this is the most common activity base used in traditional systems.
What is direct labor cost (or direct labor hours)?
An overhead cost attributed to a distinct activity, such as machine setups or purchase ordering.
What is an activity cost pool?
Step 2 focuses on identifying this element that best explains the cost behavior.
What is the cost driver?
This activity uses number of setups as its cost driver.
What is machine setups?
ABC improves management decision-making through this related concept.
What is activity-based management (ABM)?
In service firms, many overhead costs tend to be this type.
What are company-wide (or indirect) costs?
Traditional costing becomes problematic when overhead costs increase and this decreases.
What is the correlation between overhead and direct labor?
A factor that has a direct cause-and-effect relationship with the resources consumed.
What is a cost driver?
Step 3 computes this for each activity cost pool.
What is the activity-based overhead rate?
Which product uses more setups and purchase orders at Atlas Company?
What is the Ab Coaster?
ABC distinguishes between activities that add customer value and those that do not.
What are value-added vs. non-value-added activities?
In the public accounting example, overhead was allocated using this under traditional costing.
What is direct professional labor cost?
This costing approach allocates overhead using multiple cost pools and cost drivers.
What is activity-based costing (ABC)?
ABC allocates overhead in this many stages.
What is two stages?
Step 4 assigns overhead to products using this information.
What is each product’s use of cost drivers?
Under ABC, the Ab Bench’s overhead cost per unit is closest to this amount.
What is $19.20?
A major limitation of ABC is that it is more ___ and ___ than traditional costing.
What are expensive and complex?
Under ABC, the Plano Molding audit received this much overhead (rounded).
What is $57,200?
Traditional costing is most likely to overcost high-volume products and undercost low-volume, complex products.
Why? Because it uses a single activity base that ignores complexity.
This is NOT considered a cost driver:
A) Machine hours
B) Number of setups
C) Units produced
D) Square footage
What is units produced? (Too broad for ABC)
The ABC overhead rate equals estimated overhead divided by this amount.
What is estimated use of the cost driver?
Traditional costing overstated the Ab Bench cost by approximately this amount per unit.
What is $10.80?
ABC is most useful when overhead costs are this relative to total costs.
What is significant (or high)?
ABC resulted in less overhead assigned to the audit compared to traditional costing. What does this suggest?
What is traditional costing overstated the job cost?
ABC doesn’t eliminate all arbitrary allocations, but it still improves decision-making. Why?
Because it better captures cause-and-effect relationships between activities and costs.