# Essentials Of Cost Accounting

## Quiz 18 :Activity-Based Costing

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According to the text, what are the basic elements of Activity-Based Management?
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Activity Based Management (ABM) : It is an integrated and systematic approach of management that uses activity based costing information to analyze the business processes in order to make prudent decisions. This method is used to satisfy customers which results into higher profitability.
Activity based management includes aspects such as product design decisions, product mix and pricing decisions, process improvement and cost reductions decisions and planning and managing processes.
Activity based management includes 2 basic elements. The elements are as follows:
1. Identification of activities : the first basic element of ABM is to identify the activities which are performed in the organization. Activities are defined as any event, actions, unit of work which is performed within the organization that are useful for the purpose of activity based costing.
2. Determining cost and performance of activities : The second basic element is to determine the cost and performance of the activities performed in terms of both quality and time. The activities are associated with a specific goal to be performed within an organization.
These two basic elements of ABM includes three components, which are as follows:
1. Activity analysis: The basic objective of activity analysis is to identify project activities which are performed in the organization.
2. Cost driver analysis: Its purpose is to determine the cost associated with the projected activities.
3. Performance Analysis: Its primary objective is to determine the performance the projected activities and suitable measures to enhance such performance.

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How do these three elements (resources, activities, and cost objects) fit together in ABC?
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Activity based costing (ABC): It is an accounting methodology that identifies the activities that a firm performs and cost of each activity is determined, the cost of each activity is then assigned to the products and services. It is technique used to determine the product cost or product lines.
There are three elements under ABC:
1. Resources : It is defined as economic or productive factors which are required to accomplish an activity. These are the elements which are used by an enterprise to achieve desired results.
Example: materials, capital and salaries.
2. Activities : These are defined as any event, actions, unit of work which is performed within the organization that are useful for the purpose of activity based costing.
It is one of the element of ABC which includes any transactions, events and task associated with a specific goal to be performed within an organization.
Examples: setting up machines for manufacturing and designing products, distributing finished products.
3. Cost objects : These are defined as any work unit for which costs are being separately measured. It is a term used mainly in cost accounting which provides cost information about products, services and customers.
It is one of the element of ABC which is used in compiling and managing the direct and indirect cost of a business.
Examples: product lines, services, geographic territories, customers.

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What is the definition of activities?
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Activities are defined as any event, actions, unit of work which is performed within the organization that are significant for the purpose of activity based costing.
Activity based costing (ABC): It is an accounting methodology that identifies the activities that a firm performs and cost of each activity is determined, the cost of each activity is then assigned to the products and services. It is technique used to determine the product cost or product lines.
Activities is one of the elements of ABC which includes any transactions, events and task associated with a specific goal to be performed within an organization.
Examples: setting up machines for manufacturing and designing products, distributing finished products.
Under ABC, resources are being consumed by activities and activities are being consumed by cost of products and services.
Activities under ABC can be measured in two ways. Transaction drivers as it counts the number of times an activity has occurred and Duration drivers as it measures the time take by an activity for completion.

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According to the text, what is the definition of resources?
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What are the primary reasons for using ABC?
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What is the focus of ABC (activity-based costing)?
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The surgical nursing department currently allocates all costs based on an average overall cost per patient day. For last month, there were $1,000,000 of costs, and 2,000 patient days. Therefore, the cost per patientday was$500. Costs were as follows: The CFO of the hospital argues that activitybased costing (ABC) would generate more accurate cost allocations. The CFO wants to allocate costs as follows: (i) nursing time will be the cost driver for all personnel relatedcosts; (ii) patient type will be the cost driver for supplies; and (iii) other expenses will be allocated based on patient days. There are three types of patients: A, B and C. A special cost study yields the following information: The Patient Classification System indicates the following average nursing time per patient- day: Use ABC to determine the cost per patient for each of these three types of patients and compare these costs to a cost allocation system based solely on patient days. Be specific about any assumptions that you make and show all of your work in a logical fashion.
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What is the definition of cost object?
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Wagner Hospital currently allocates all maintenance department costs based on departmental square feet. However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment. His contention is that the pharmacy has relatively little equipment that breaks. However, it must subsidize many high-tech departments that require expensive equipment repairs. Using the data given below, calculate the maintenance cost assigned to the pharmacy using the existing method and an ABC approach.
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