Cost Management 2nd edition, Ch 07 -
Activity-Based Costing & Management
What is the difference between Traditional Costing Systems & Activity-Based Costing Systems?
ANS: Traditional Costing System: few cost pools allocated using traditional allocation bases.
Activity-Based Costing System: Multiple cost pools reflecting activities and cost drivers for
allocation bases.
What are Activities, and how are they identified? ANS: Activity - type of task of function
performed in an organization.
Activity Identification:
* Track the use of resources.
* Use the cost hierarchy.
* Grouping homogeneous costs.
What is the cost hierarchy for activities? ANS: 1. Organization-sustaining activities
2. Facility-sustaining activities
3. Customer-sustaining activities
4. Product-sustaining activities
5. Batch-level activities
6. Unit-level activities
What is the process used to assign costs in an ABC system? ANS: 1. Identify the relevant cost
object.
2. Identify activities.
3. Assign (trace and allocate) costs to activity-based cost pools.
4. For each ABC cost pool, choose a cost driver.
5. For each ABC cost pool, calculate an allocation rate. (Allocation rate = Activity cost / Volume
of cost driver)
6. For each ABC cost pool, allocate activity costs to the cost object. (Allocation = Allocation rate
* Actual volume of activity)
What are 3 alternative allocation rates? ANS: * Past Cost Rate: use past costs and past volumes.
* Estimated Rate: use estimated costs and estimated volumes.
* Supply-Based Rate: use estimated costs and practical capacity.
What should you look for when selecting cost drivers in an ABC system? ANS: 1. Cause and
effect relationship between cost driver and activity costs.
Activity-Based Costing & Management
What is the difference between Traditional Costing Systems & Activity-Based Costing Systems?
ANS: Traditional Costing System: few cost pools allocated using traditional allocation bases.
Activity-Based Costing System: Multiple cost pools reflecting activities and cost drivers for
allocation bases.
What are Activities, and how are they identified? ANS: Activity - type of task of function
performed in an organization.
Activity Identification:
* Track the use of resources.
* Use the cost hierarchy.
* Grouping homogeneous costs.
What is the cost hierarchy for activities? ANS: 1. Organization-sustaining activities
2. Facility-sustaining activities
3. Customer-sustaining activities
4. Product-sustaining activities
5. Batch-level activities
6. Unit-level activities
What is the process used to assign costs in an ABC system? ANS: 1. Identify the relevant cost
object.
2. Identify activities.
3. Assign (trace and allocate) costs to activity-based cost pools.
4. For each ABC cost pool, choose a cost driver.
5. For each ABC cost pool, calculate an allocation rate. (Allocation rate = Activity cost / Volume
of cost driver)
6. For each ABC cost pool, allocate activity costs to the cost object. (Allocation = Allocation rate
* Actual volume of activity)
What are 3 alternative allocation rates? ANS: * Past Cost Rate: use past costs and past volumes.
* Estimated Rate: use estimated costs and estimated volumes.
* Supply-Based Rate: use estimated costs and practical capacity.
What should you look for when selecting cost drivers in an ABC system? ANS: 1. Cause and
effect relationship between cost driver and activity costs.
