Ch8: activity-based costing

Question 1

What are problems with traditional cost systems?

Answer 1

failure to adapt to changing business environment - increasing proportion of non manufacturing costs & increasing levels of non volume drive manufacturing overhead costs

Question 2

What are cause of changes in cost structures?

Answer 2

• increased automation
• increasing product diversity and complexity
• increased emphasis on upstream and downstream areas of the value chain

Question 3

What are four conditions that cause problems for traditional cost systems?

Answer 3

• increased product diversity
• proportion of direct labour costs decreases and proportion of manufacturing overhead increases
• proportion of manufacturing overhead costs, not related to production volume increases
• non manufacturing costs that are product related become substantial

Question 4

What the steps of ABC?

Answer 4

• overhead costs are assigned to activities (individual cost pools)
• overhead costs are applied to products via cost driver (or activity driver)

Question 5

Explain the ABC model.

Answer 5

Costing view ABC - measures cost of activities, assigns activity costs to cost objects

Three types of cost drivers - resource drivers, activity drivers, root-cause cost drivers

Question 6

What is ABM?

Answer 6

Activity based management - ABM - provides information to manage activities, costs and other sources of customer value.

Question 7

When should ABC be used?

Answer 7

• Do we make more than one product?
• Do we make multiple products using different processes?
• Do we have a high proportion of non unit level costs?
• Are overheads significant portion of total costs?

Question 8

What factors have an impact on deciding to implement ABC system?

Answer 8

High costs association with using inaccurate information for decision making.

Cost of implementing and maintaining ABC system is low due to good IT support.

Question 9

What are the three different forms of ABC?

Answer 9

• simple approach: allocates manufacturing overhead costs to products
• ABC system for indirect costs: allocates manufacturing overhead and non manufacturing costs to products.
• Comprehensive system: allocates all product related costs, except direct material, to products and is used for activity management.

Question 10

What are four limitations of ABC?

Answer 10

• facility levels costs: how are these allocated, is it necessary to be so detailed?
• uses average costs: limited usefulness if products have customisation
• complexity: analysis, expensive, challenging to implement
• challenging in service firms: non repetitive, facility level costs are high.