Activity-Based Costing (ABC) and Traditional Product Costing

Activity-Based Costing (ABC) and Traditional Product Costing
Chapter 4 questions
5. What are the principal differences between activity-based costing (ABC) and traditional product costing?
The difference between activity based costing and traditional product costing is in the complexity and accuracy (Machlup, 559). Traditional costing is simple and less accurate and assigns overhead expenses to product based on arbitrary average rate. On the other hand, ABC is complex and accurate.
6. What is the equation for computing activity-based overhead rates?
Est. OH per activity / est. use of cost drivers per activity
7. What steps are involved in developing an activity-based costing system?
Step 1- Identifying the cost pool,
Step 2-Identifying the cost driver
Step 3- Calculate the rate
Step 4- Use the rate to allocate overhead
9. What is an activity cost pool?
This is the Cost related to a specific activity
10. What is a cost driver?
This is a unit of an activity that causes the change in activity's cost.
13. What are the primary benefits of activity-based costing?
ABC has a high number of OH rates and this is what makes it more accurate.
14. What are the limitations of activity-based costing?
It is expensive because it requires a lot of work.
Chapter 5 questions
1 What is cost behavior analysis?
Cost behavior analysis is the attempt to understand how operating cost adjusts in connection to a change in the level of activity in an organization.
Why is cost behavior analysis important to management?
Cost behavior analysis assist managers to determine if any cost will increase or decrease in case there is a change in business in activities.
3. Contrast the effects of changes in the activity level on total fixed costs and on unit fixed costs.
Total fixed costs remains the same in total despite the changes in the level of activity. In contrast, fixed costs per unit differ inversely with activity. When volume increases, fixed costs per unit decreases and vice versa (Jiambalvo, 56). It is important to note that the average range is the range of activity an organization expects to operate in a year.
7. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification?
When it comes to CVP analysis, missed costs are classified into their variable and fixed elements (Lin). The high low method that is used to effect the appropriate classification. The approach entail taking the highest level of activity and the lowest level of activity and comparing the total of each.
Chapter 6 questions
1. What is meant by CVP analysis?
CVP analysis is a way of analyzing how adjustments in fixed and variable costs impacts the profit of an organization. CVP is used to check how many units a company needs to sell to reach a particular minimum profit margin or break even.
3. Distinguish between a traditional GAAP income statement and a CVP income statement.
CVP statement is prepared for internal use while traditional GAAP statement is used for external reporting. Additionally, CVP statement classifies expenses and costs as fixed or variable, while GAAP statement classifies costs and expenses by function (Li, Zhu & Chen, 300).<...