10 Questions
What is the purpose of tracing business sustaining costs?
To assign costs that cannot be logically traced to products or customers to senior management or regulatory agencies.
Why should business-sustaining costs not be allocated to products or customers?
Allocating them to products or customers would be misleading and would overstate their costs.
What are business-sustaining cost objects in the context of ABC?
Senior management and regulatory agencies.
Can business-sustaining costs be logically traced to specific products or customers?
No, the consumption of these costs cannot be logically traced to products, standard service-lines, channels, or customers.
Give an example of a business-sustaining cost activity mentioned in the text.
Monthly 'closing books' activity of the accounting staff and 'file government regulatory papers' activity of the legal staff.
How are business-sustaining costs different from other activity costs?
Business-sustaining costs are not caused by making products or delivering services to customers.
What is the significance of tracing $30 of support activities to other types of activities in the ABC cost assignment network?
Support activities are traced to other types of activities before being allocated to products, customers, or business-sustaining cost objects.
Why are business-sustaining costs absorbed as calculated costs into senior management and regulatory agencies?
Because the consumption of these costs cannot be logically traced to products or customers.
Explain how business-sustaining costs should be treated in cost assignment.
Business-sustaining costs should be traced to senior management and regulatory agencies as cost objects.
Why is it important to have an enterprise-wide view of an ABC cost assignment network?
To accurately trace costs from activities to products, customers, and business-sustaining cost objects.
Study Notes
- Activity-based costing (ABC) involves tracing costs from activity to activity based on cause-and-effect relationships.
- The ABC model simplifies by using resource pools to categorize expenses before assigning them to activities based on demand.
- For a manufacturing company, costs directly related to activities like "performing maintenance" and "operating the tool room" are accumulated separately.
- The cost assignment view converts resource expenses into activity costs and then into final cost objects like products or customers.
- ABC emphasizes the cost assignment view over the process view, which sequences activity costs through a business process.
Learn about the Activity-Based Costing (ABC) model, which involves tracing costs from activity to activity based on cause-and-effect relationships. Understand the relationships between indirect work activities, other activities, and cost objects. Some organizations simplify the ABC model using the concept of resource expenses.
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