True / False: Activity-based costing can be used with (1) job costing, (2) processing costing?
True - it can be used for all types of cost accumulation systems.
Why is activity-based costing (ABC) used?
When one single overhead application rate isn't applicable because there are multiple causes and effects that influence how overhead should be applied to product cost
When switching from traditional product costing to activity based costing; for a low-volume product are unit cost higher or lower when using ABC?
typically substantially higher
What are the benefits of using ABC costing compared to traditional costing?
- More accurate because it applies more overhead to areas that use more resources (as opposed to being based simply on quantity)
- More flexible
- Takes a long-term viewpoint
What are the limitations of ABC Costing?
- Cannot be used for external reporting
- Very expensive to create and implement
- Not always accepted by the employees
What are the steps involved in implementing an ABC Costing system?
- DEVELOP A BUDGET WITH THE FOLLOWING INFO
- (1) identify activity centers
- (2) identify the cost driver within each activity center(3) determine how much cost per activity center is accumulated
- (4) determine the activity level within each activity center based on the cost driver
- (5) determine a cost/driver
- APPLY THE OVERHEAD TO ACTUALS
- Apply the cost/driver to the actual driver amount to calculate total cost per activity
What are the 2 methods of service cost allocation using ABC? Provide a brief description.
- (1) Direct Method: costs are allocated to production w/o concern for whether services are performed for other service areas.
- (2) Step-Down Method: Costs are assigned to other service centers and then allocated to production.
Provide definitions for the following regarding joint product costing: (1) joint products, (2) by-products, (3) split-off point, (4) separable costs
- (1) two or more products that are generated from a common input
- (2) minor products of relatively small value that result from the manufacture of the main product
- (3) the point at which the joint products can be recognized as individual products
- (4) costs incurred on a product after the split-off point
What are the two methods of assigning joint costs to more than one product line?
- (1) based on volume
- (2) based on relative net realizable values at split-off point
How are joint costs assigned to separate products? Assume ProdA produces 10,000gal, ProdB produces 20,000gal. How would joint costs be assigned
- (1) determine a cost driver, such as production hours, units of product, or similar
- (2) Use a proportional method based on the cost driver
- Example: 1/3 of joint costs would go to ProdA (10,000gal/30,000gal total), 2/3 to ProdB
When using the net realizable value method of assigning joint costs, which 2 methods can be used?
- (1) If NRV at split off is known, use proportional amounts based on total NRV per product.
- (2) If NRV is unknown, calculate the NRV at split off = final selling price - identifiable costs incurred after split-off
- (3) when more than one product is involved, use the NRV at split off if known, calculate for the others.
If by-products can be sold at the end of the joint production process, how is the amount received applied to the cost allocation?
- Proceeds from the sale reduce the common costs for joint product costing OR
- The revenue can be considered miscellaneous income.
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to what?
Net (or relative) sales value at split off