ABC Method
More accurate because it does a better job of identifying activities that actually drive overhead costs and how
different product's production methods drive those costs.
While ABC is more complex and costly to implement, it is more accurate. The process of developing an ABC
system can also help the firm identify problem areas in their production process.
Using ABC tends to be worth the extra cost when a firm produces multiple products that are produced in very
different ways (i.e., have fairly complex production processes). If the firm only has one produce or if their
products are very similar in how they are produced, then ABC.
Analyze a statement of cash flows to identify operating, investing, and financing activities.
Financing Activities:
Balance sheet accounts i.e. Long-term liabilities and equity accounts i.e. mortgage payable; common stock
and additional-paid-in capital (cash received from stockholders); retained earnings (cash paid for dividends)
,Analyze a statement of cash flows to identify operating, investing, and financing activities.
Investing Activities:
Balance sheet accounts: Long-term assets. i.e. property, plant, and equipment; investments i.e. cash paid for
equipment, cash paid for investments (stock, loans)
Analyze a statement of cash flows to identify operating, investing, and financing activities.
Operating Activities:
All categories that are on the income statement, and all current assets and liabilities. i.e. sales (cash received
from customers); cost of goods sold (cash paid for inventory); operating expenses (cash paid for rent);
Articulation
In an accounting context, articulation means that the three primary financial statements are not isolated lists of
numbers but are an integrated set of reports on a company's financial status. The statement of cash flows
contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to
end of year. The income statement, combined with the amount of dividends declared during the year, explains
the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash
flows is transformed into net income through the accounting adjustments applied to the raw cash flow data.
,Calculate the cost of a product
Product costs = Direct labor + Direct Materials + Factory Overhead
Factory overhead = Indirect labor + Indirect materials + “Factory expenses”
Can you calculate the product costs for September?
Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000
Total product costs = 20,000 + 25,000 + 23,000 = 68,000
Total non-product costs = 2,000 + 5,000 = 7,000
, Company Management
Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and
to illuminate company weaknesses.
Comparability
Information that becomes much more useful when it can be related to a benchmark or standard. Also, other
firm's results or the firm's own history.
Compare and Contrast Traditional Costing to Activity-Based Costing (ABC).
ABC is a more accurate product costing system than traditional product costing systems.
ABC requires more time and expense to administer than do traditional costing systems.
Companies with diverse products involving substantially different production processes, an ABC system yields
better cost data and better management decisions.
Competitors
Competitors use financial accounting information to reveal strategic opportunities within their industry.
More accurate because it does a better job of identifying activities that actually drive overhead costs and how
different product's production methods drive those costs.
While ABC is more complex and costly to implement, it is more accurate. The process of developing an ABC
system can also help the firm identify problem areas in their production process.
Using ABC tends to be worth the extra cost when a firm produces multiple products that are produced in very
different ways (i.e., have fairly complex production processes). If the firm only has one produce or if their
products are very similar in how they are produced, then ABC.
Analyze a statement of cash flows to identify operating, investing, and financing activities.
Financing Activities:
Balance sheet accounts i.e. Long-term liabilities and equity accounts i.e. mortgage payable; common stock
and additional-paid-in capital (cash received from stockholders); retained earnings (cash paid for dividends)
,Analyze a statement of cash flows to identify operating, investing, and financing activities.
Investing Activities:
Balance sheet accounts: Long-term assets. i.e. property, plant, and equipment; investments i.e. cash paid for
equipment, cash paid for investments (stock, loans)
Analyze a statement of cash flows to identify operating, investing, and financing activities.
Operating Activities:
All categories that are on the income statement, and all current assets and liabilities. i.e. sales (cash received
from customers); cost of goods sold (cash paid for inventory); operating expenses (cash paid for rent);
Articulation
In an accounting context, articulation means that the three primary financial statements are not isolated lists of
numbers but are an integrated set of reports on a company's financial status. The statement of cash flows
contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to
end of year. The income statement, combined with the amount of dividends declared during the year, explains
the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash
flows is transformed into net income through the accounting adjustments applied to the raw cash flow data.
,Calculate the cost of a product
Product costs = Direct labor + Direct Materials + Factory Overhead
Factory overhead = Indirect labor + Indirect materials + “Factory expenses”
Can you calculate the product costs for September?
Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000
Total product costs = 20,000 + 25,000 + 23,000 = 68,000
Total non-product costs = 2,000 + 5,000 = 7,000
, Company Management
Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and
to illuminate company weaknesses.
Comparability
Information that becomes much more useful when it can be related to a benchmark or standard. Also, other
firm's results or the firm's own history.
Compare and Contrast Traditional Costing to Activity-Based Costing (ABC).
ABC is a more accurate product costing system than traditional product costing systems.
ABC requires more time and expense to administer than do traditional costing systems.
Companies with diverse products involving substantially different production processes, an ABC system yields
better cost data and better management decisions.
Competitors
Competitors use financial accounting information to reveal strategic opportunities within their industry.
