Course Outline
Join PRO

Activity Based Costing (Crossword Puzzles)

Author:
Harold Averkamp, CPA, MBA

Activity Based Costing

Open Online Open PDF

Activity based costing (ABC) arose from the shortcomings of assigning an ever-increasing amount of manufacturing overhead to products on the basis of one variable, such as direct labor hours or machine hours.

When manufacturing overhead costs are allocated, spread, or assigned to products on the basis of the production equipment's machine hours, a low volume product will be assigned few overhead dollars. However, this product might actually use a significant amount of setup time, movement of materials, and require other attention. Using only the machine hours as the means of allocating overhead will result in this product being assigned too little cost for all of the work it is causing.

On the other hand, another product that runs day and night with few setups and not much special handling will be assigned an enormous amount of overhead due to the high number of machine hours. As a result, this product will be assigned far more overhead costs than it is causing.

When companies manufacture diverse products and have diverse demands from its customers, the allocation of manufacturing overhead on one base, such as machine hours, will lead to cost distortions. In a competitive environment a company might lose a customer if it raises its price based on faulty cost allocations.

Activity based costing seeks to find the real cause of the overhead and to assign the appropriate overhead to the products and customers that are causing or driving those overhead costs.

A common activity (out of the many activities involved in manufacturing a product) is setting up a machine for a production run. The setup activity is likely to be the same whether the production run or batch will be 100 units or 10,000 units. If the setup activity costs $200, then $200 should be assigned to each batch or production run. If you don't recognize the setup activity and simply allocate the cost on the basis of machine hours, you might end up with lots of low volume production runs and few high volume production runs. That could lead to financial disaster.

Striving to learn about activities and their costs has led to what is referred to as activity based management.

Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus