Please fill in the blank:

Activity-based costing: an overview

• Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect ____________ and, therefore, fixed as well as variable costs.
  • It is ordinarily used as a __________________________ to, rather than a replacement for, the companys usual costing system.
• ABC differs from traditional cost accounting in three ways:
  • ____________________________________________________ may be assigned to products, but only on a cause-and-effect basis.
  • Some manufacturing costs may be _______________ from product costs.
    • ABC excludes two types of costs from product costs:
      • _____________________________________ -
  • Numerous __________________________ are used, each of which is allocated to products and other cost objects using its own unique measure of activity.
    • An _______________ is any event that causes the consumption of overhead resources.
    • An _______________________________ is a bucket in which costs are accumulated that relate to a single activity measure in an ABC system.
    • An ___________________ is an allocation base in an activity-based costing system. The term _________________ is also used to refer to an activity measure. The two most common types of activity measures are:
      • _________________ are simple counts of the number of times an activity occurs, such as the number of bills sent out to customers.
      • ___________________ measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers.
• ABC defines five levels of activity that largely do not related to the _________________ of units produced.
• ____________________ are performed each time a unit is produced.
  • Example:

• _____________________ are performed each time a batch if handled or processed, regardless of how many units are in the batch.
  • Example:

• ____________________ relate to specific products and must be carried out regardless of how many batches are run or units are produced or sold.
  • Example:

• ____________________ relate to specific customers and are not tied to any specific product.
  • Example:

• _____________________ are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.
  • Example:

The five steps for implementing ABC

• Define ___________________________________________.
• Assign overhead costs to _____________________________.
  • These activity cost pools are based on their _________________.
• Calculate ____________________________________.
  • The activity rates are computed by dividing the _________________ for each activity by its _______________________.
  • This is done for each activity.
• Assign overhead costs to ___________________________________.
• Prepare management report.
  • Product margin is a function of the products _____________________________ _________________ that the product causes.
  • Customer margin allows the company to cultivate relationships with its most profitable customers while taking steps to reduce the negative impact of unprofitable customers.

Problem with Traditional Costing

• Typical allocation bases include direct labor hours and machine hours.
• Assumes all overhead costs are proportional to _________________________.
• When overhead costs are not proportional to production volumes:
  • High-volume products are ____________________.
  • Low-volume products are ____________________.
• In ABC, this is corrected as batch-related and product-level costs are allocated using appropriate batch and product cost drivers.

Target process improvements

• _______________________________ is used in conjunction with ABC to identify areas that would benefit from process improvement. It involves focusing on activities to eliminate waste, decrease processing time, and reduce defects.
• The activity rates computed in ABC can also provide valuable clues concerning where there is __________ and the opportunity for improvement.
  • _______________________ can be used to compare an organizations activity rates with standards of performance that are external to the organization.

The limitation of ABC

• There are five limitations of ABC:
  • Implementing an ABC system requires __________________________.
    • The benefits of increased cost accuracy may not outweigh the implementation costs.
  • ABC systems produce numbers, such as ___________________, that are at odds with the numbers produced by traditional cost systems.
    • Managers are not accustomed to managing their operations using these numbers; hence, ABC inevitably faces _________________.
  • In practice, most managers insist on _________________________ all costs to products.
    • The ABC system described in the main portion of this chapter does not conform to this preference.
  • ABC systems do not automatically identify the _________________ for particular decisions; therefore, ABC data can be easily misinterpreted and must be used with care when making decisions.
    • Costs assigned to products, customers, and other cost objects are only _________________________.
  • Most organizations use ABC as a _____________________ to rather than a replacement for their existing cost system.
    • Maintaining two cost systems is costlier than maintaining just one system and it may cause confusion about which set of numbers is to be relied on.