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chapter 20
Process Costing and
Activity-Based Costing
goals discussion
goals
achievement
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in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Describe the approach to accumulating product cost using a job costing system.
Describe the fundamental characteristics of a process costing system.
Compare and contrast process costing and job order costing systems.
What is an equivalent unit of production and what are conversion costs?
Why is it important to differentiate between materials and conversion costs?
Describe the steps in applying process costing.
Be able to calculate equivalent units of production, taking into account beginning work in process, and current period production amounts (using a weighted-average method).
Be able to prepare a cost of production report (weighted-average method).
Identify the nature and timing of journal entries that are necessitated by process costing.
Be able to calculate equivalent units of production, taking into account beginning work in process, and current period production amounts (using a FIFO method).
Be able to prepare a cost of production report (FIFO method).
Identify the problem associated with traditional costing methods, and describe how activity-based costing mitigates this concern.
Be able to illustrate the fundamental mathematics of activity-based costing versus traditional approaches.
Know ABC concepts relating to cost objects, activity drivers, activities, resource drivers, and resources.
Describe the different "levels" at which activities can occur and tell why this is important for ABC.
Understand how and why ABC can produce different outcomes than traditional costing approaches; know the importance of ABC to management decision making.
Know that ABC may not be consistent with GAAP in a particular situation; understanding the fundamental difference in the handling of manufacturing versus nonmanufacturing costs.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| ABC/activity based costing | Alternative costing method for strategic management; divides production into activities, defines costs for activities, and allocates costs to objects based on activity consumption |
| activity | An event that gives rise to the consumption of resources |
| activity cost pool | The costs assigned to a particular activity |
| activity driver | Event that causes consumption of an activity |
| batch-level activity | Activities that relate to each batch of production; independent of the number of units within that batch |
| cost object | The output for which costing information is to be determined under ABC; can be product or service related, or customer, market, etc. |
| cost of production report | A report used in a process costing environment to tabulate the costs incurred within a particular stage/department |
| customer-level activity | Activities that relate to each customer; independent of the volume of goods and services provided to the specific customer |
| entity-sustaining activity | Activities that relate to an entity's ability to operate; independent of business volume |
| equivalent units | A measure of physical units expressed in terms of finished units |
| FIFO process costing | A process costing technique where the beginning inventory is presumed to be the first units completed in the subsequent period's processing |
| market-level activity | Activities that relate to the number of markets in which an entity operates; independent of the number of products, customers, etc. |
| process costing | Process costing is a method to allocate the total costs of production to homogenous units produced via a continuous process that usually involves multiple steps or departments |
| product-level activity | Activities that relate to the number of products produced; independent of the number or units produced |
| resource | The elements consumed by activities and cost objects |
| resource driver | The concept that activities create the need for resources which will be consumed in the production process |
| unit-level activity | Activities that relate to the number of units of output; each additional unit of production requires another activity |
| weighted-average process costing | A process costing technique where all units of production are assigned the same cost; determined by blending of current period costs with beginning inventory cost |