abc costing

What is the main purpose of Activity Based Costing (ABC)?

• To identify labour hours

• To allocate overhead based on activities

• To determine quality control costs

• To calculate direct material costs

What is a cost driver in ABC?

• Activities that drive the costs

• Direct labour costs

• Machine maintenance costs

• Transportation costs

What are cost pools in ABC?

• Direct material costs

• Distinct activities that drive costs assigned in monetary value

• Indirect labour costs

• Marketing costs

What is the formula for calculating the cost driver rate in ABC?

• Machine maintenance cost / Production units

• Direct labour cost / Direct material cost

• Total overhead / Number of employees

• Cost pool / Basis of activity driver

What are the steps for designing ABC?

• Identify production units, Calculate labour hours, Calculate machine hours, Calculate total overhead costs

• Identify marketing activities, Trace costs to the departments, Calculate total costs, Prepare financial statements

• Calculate direct material costs, Calculate direct labour costs, Calculate overhead costs, Calculate total production costs

• Identify activities and cost classification, Trace costs to the pools, Relate activities to the cost drivers and then to the rate, Total up the costs and show new costs under the new classification

What is the main difference between Traditional Costing and ABC?

• Traditional Costing has more levels of cost hierarchy than ABC

• ABC uses cost drivers to determine cost objects, while Traditional Costing uses blanket rates

• Traditional Costing is more expensive than ABC

• ABC only considers direct costs, while Traditional Costing considers indirect costs

What is a limitation of ABC?

• ABC is inexpensive to implement

• Cost driver basis is accurate

• Pricing and decision making are not improved

• Classification of overheads is subjective

What is an advantage of ABC?

• Management has better control because cost pools are identified

• Budgets are not better prepared under ABC

• ABC does not provide better understanding towards costs not driven by volume only

• ABC does not assist in cost control