9706 · 4.1.1
Activity Based Costing flashcards
Revision flashcards for Cambridge 9706 Activity Based Costing (syllabus 4.1.1). Flip, recall, then mark a real past-paper question.
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What is Activity Based Costing (ABC)?
A costing method that identifies activities in an organisation and assigns the cost of each activity to all products and services according to the actual consumption by each.
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What is a cost driver?
A factor that causes a change in the cost of an activity. For example, the number of machine set-ups is a cost driver for set-up costs.
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What is a cost pool?
A grouping of individual overhead costs that are all associated with one particular activity, such as quality inspections or machine maintenance.
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What is the formula for a cost driver rate?
Cost Driver Rate = Total Cost in the Activity Cost Pool / Total Volume of the Cost Driver.
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What is a major limitation of ABC?
It is expensive and time-consuming to implement and maintain, as it requires extensive data collection and analysis.
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How does ABC improve on traditional absorption costing?
It provides a more accurate allocation of overheads by using multiple cost drivers linked to activities, rather than a single, often arbitrary, volume-based absorption rate.
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When is a business most likely to benefit from implementing ABC?
When it has high overhead costs, a diverse product range with varying complexity, and complex production processes where overheads are not driven by volume alone.
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What are the five main steps for implementing Activity Based Costing?
1. Identify major activities. 2. Assign overheads to activity cost pools. 3. Identify the cost driver for each activity. 4. Calculate the cost driver rate for each activity. 5. Assign overhead costs to products based on their consumption of activities.