Chapter 7 - Activity-based costing and management. In this chapter students will be able to: Differentiate activity-based costing (ABC) from traditional costing, use cost hierarchy to help assign costs to activities, apply an ABC system in assigning costs,. | Chapter 7: Activity-Based Costing and Management LO1 Differentiate activity-based costing (ABC) from traditional costing LO2 Use cost hierarchy to help assign costs to activities LO3 Apply an ABC system in assigning costs LO4 Describe the characteristics and use of activity-based management (ABM) LO5 Explain GPK and RCA LO6 Describe how ABC, GKP, and RCA affect managers’ incentives and decisions LO1 Differentiate activity-based costing (ABC) from traditional costing Activity-Based Costing (ABC) Activity-based costing (ABC) is a system that assigns overhead costs to the specific activities performed in a manufacturing or service delivery process. An activity is a type of task or function performed in an organization. The costs of the various activities become the building blocks used to compile total costs for products or other cost objects The first bullet is automated. One click is required for each remaining bullet. Traditional Costing vs. ABC Traditional costing systems: Product A Product B Product C Indirect Costs Direct Costs Direct Costs Direct Costs Direct costs are traced to the individual products. The individual products are the final cost objects. Indirect costs are grouped into one (or a small number) of cost pools; a cost allocation base assigns costs to the individual products The yellow cost object group is animated. The first click starts the sequence to show direct cost assignment to the products. The second click begins the sequence to show indirect cost assignment to the products. Traditional Costing vs. ABC Activity-based costing systems: Indirect Costs Product A Product B Product C Direct Costs Direct Costs Direct Costs The individual products are the final cost objects & direct costs are traced to the individual products. Indirect costs are assigned (traced & allocated) to various pools of activity costs. Activity 1 Activity 2 Activity 3 Activity costs are allocated to products The text box in the lower right hand corner is automated and . | Chapter 7: Activity-Based Costing and Management LO1 Differentiate activity-based costing (ABC) from traditional costing LO2 Use cost hierarchy to help assign costs to activities LO3 Apply an ABC system in assigning costs LO4 Describe the characteristics and use of activity-based management (ABM) LO5 Explain GPK and RCA LO6 Describe how ABC, GKP, and RCA affect managers’ incentives and decisions LO1 Differentiate activity-based costing (ABC) from traditional costing Activity-Based Costing (ABC) Activity-based costing (ABC) is a system that assigns overhead costs to the specific activities performed in a manufacturing or service delivery process. An activity is a type of task or function performed in an organization. The costs of the various activities become the building blocks used to compile total costs for products or other cost objects The first bullet is automated. One click is required for each remaining bullet. Traditional Costing vs. ABC Traditional costing systems: Product
