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CHAPTER 5: ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT

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: Book Summary

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: Cost Accounting: A Managerial Emphasis 15th Edition by Charles T
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Datar, and Madhav V
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That’s because simple peanut-butter costing broadly averages or spreads
the cost of resources uniformly to cost objects when, in fact, the individual products or
services use those resources in nonuniform ways
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This
can lead to certain strategic consequences, as follows
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Undercosted products will be
underpriced and may even lead to sales that actually result in losses because the sales
may bring in less revenue than the cost of resources they use
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But what if prices are determined by the market based on
consumer demand and competition among companies? In this case, product
undercosting and overcosting cause managers to focus on the wrong products
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They give less attention to
undercosted products thinking they are highly profitable, when in fact these products
consume large amounts of resources and are far less profitable than they appear
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Learning Objective 3

: Distinguish between Simple and Activity-Based Costing
(ABC) Systems

The ABC system differs from the simple system by its fundamental focus on activities
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Learning Objective 4


: Describe a Four-Part Cost Hierarchy

Output unit–level costs are the costs of activities performed on each individual unit of
a product or service
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Examples include setup
costs, material-handling and quality-inspection costs associated with batches of
products produced and costs of placing purchase orders, receiving materials, and
paying invoices related to the number of purchase orders placed;



Product-sustaining costs (service-sustaining costs) are the costs of activities
undertaken to support individual products or services regardless of the number of
units or batches in which the units are produced
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Examples
include the general administration costs
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Identify the products that are the chosen cost objects;

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