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In the Cost-System Hierarchy, what are unit-level activities?
Performed on each individual unit of output or service (e.g., labor, raw materials, energy, inspection--all units produced)
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In the Cost-System Hierarchy, what are batch-level activities?
Performed on a group of units produced or services performed. (e.g., set-up activity, ordering of materials, inspection activity)
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In the Cost-System Hierarchy, what are product-sustaining activities?
Activities undertaken to sustain individual products or services; by definition, unrelated to output volume or # of batches (e.g., engineering - support)
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What are cost driver examples for product-sustaining activities?
- # of products produced
- # of components in each product
- # of unique components in each product
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What are cost driver examples for unit-level activities?
- # of units produced (i.e., output volume)
- # of DLHs
- # of machine hours
- $DL
- $DM
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What are cost driver examples of batch-level activities?
- # of purchase orders executed
- # of production setups
- # of set-up hours
- # of batches produced
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In the Cost-System Hierarchy, what are facility-sustaining activities?
Activities that cannot be related to any given product or service, to the number of batches produced, or to output volume (e.g., administrative costs, factory rent, property taxes on the plant)
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What are the two estimated parameters required for time-driven activity-based costing (TDABC)?
- The cost rate for each type of indirect resource.
- An estimate of how much of each resource's capacity (such as time or space) is used by the activities performed to produce the various products and services
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What is the cost assignment equation for the estimates of two parameters.
Cost of using resources i by product j = Capacity cost rate of resource i x Quantity of capacity of resource i used by product j
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Cost systems that allocate overhead to products based on the direct labor hours of each product produced will lead to what?
- Indirect and support expenses are high, especially when they exceed the cost of the allocation base itself (such as direct labor cost)
- Product diversity is high
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What are characteristics of the cost of unused capacity?
- It's not assigned to products--but it should not be ignored.
- It's assigned to product lines where the demand failed to materialize.
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How can capacity costs change?
- Demand for the capacity resources change.
- Managers make decisions to change the supply of committed resources.
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What is the cost of unused capacity?
A period cost caused by having slightly more capacity than was actually required for the volume and mix of products produced.
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Capacity changes when what changes?
Practical capacity
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What advantages does TDABC have over ABC?
- Easy and fast to build an accurate model.
- Creates detailed transactions usable for ERP systems.
- Drives costs to transactions and orders with time equations.
- Provides visibility to capacity utilization.
- Enables managers to forecast future resource demands.
- Easy to update model as resource costs and process efficiencies change.
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