COMM 305 Chapter 5: Activity-Based Costing (Weygandt: Managerial Accounting, 4th Ed)
12 Feb 2017
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Document Summary
Activity-based costing (abc) - overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns activity cost pools to products or services by using cost drivers that represent activities used. Activity - any event, action, transaction, or work sequence that causes cost to be incurred in producing product or providing a service. Activity cost pool - overhead cost allocated to distinct type of activity or related activities. Cost driver - any factor or activity that has direct cause-effect relationship with resources consumed. In abc, companies use cost drivers to assign activity cost pools to products or services. If little or no correlation between changes in cost driver and consumption of overhead cost, will result in inaccurate product/inventory costs. Benefits leads to more cost pools, therefore, more accurate product costing. 1: leads to enhanced control over overhead costs, leads to better management decisions. Costs allocated more directly on cost drivers basis used to make ea. prod.
