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AC 222


an event or process that consumes overhead resources

activity cost pool

overhead resources-line items of cost-consumed by the activity

activity measure

allocation base or cost driver used to measure the use of an activity

transaction driver

how many times an activity is performed; number of purchase orders

duration driver

time required to perform an activity; a higher level measure than a simple transaction driver; machine set up hours

activity levels

levels of the cost driver- reflect the way in which the cost driver occurs

unit level activity

done every time one unit of product is made; DL

batch level activity

done once for a bunch of units; set up copy machine once specify color, staple left, and make 200 copies

product level activity

carried out for entire product line, regardless of how many batches of product you'll make, or how many units any one batch will contain; food recipe

customer level activity

done for a customer as opposed to for the product the customer buys; sales calls

organization sustaining activity

supports production, supports long term decision not affect by short term fluctuations in products or volumes

activity based management

study activities, their costs, and how products use them. discover ways to improve production processes, remove non-value adding steps and costs, and increase efficiency and capacity w/o increasing costs

green costs

will be automatically eliminated if the product is eliminated

yellow cost

can be eliminated but it will require a management decision-won't automatically happen

red cost

difficult and often costly to remove and can seriously impair other aspects of the business if care if not taken in reducing these costs

absorption costing

charges all manufacturing overhead, fixed and variable, to units of product(full costing)

job order costing

way of organizing work in process, that that each batch of product is distinguished from other batches of the same product, or other products

process costing

homogenous product, continuous production, keeps track of WIP by department instead of job; unit product cost- total Manufacturing cost during pd./total units completed

decentralized organization

decision-making is spread throughout the different levels of management

responsibility center

part of an organization whose manager has control over cost, profits, and/or investments

cost center

manager control costs but not any revenues or invested funds

profit center

manager controls costs and revenues but not invested funds

investment center

control over costs, profits, and invested funds


any part of the company about which management wants cost, revenue or profit data

balanced scorecard

Supports the company's strategy: a plan for achieving goals, Performance measures that employees can understand and carry out; emphasis not on meeting goals but on improvement

transfer price

needed when one segment of a company provides goods or services to another segment of the same company and both managers have profit responsibility


occurs when managers do not act in the best interest of the company although they may be benefiting their own segment

idle capacity

no opportunity cost b/c enough capacity exists to product the transferred units w/o any effect on sales to outside customers

no idle capacity

units can only be produced if some outside sales are foregone

relevant cost

a future cost that will differ b/w the alternatives

differential cost

differs b/w alternatives

incremental cost

additional cost of one unit

opportunity cost

benefit forgone when one alternative is selected over another

sunk cost

past cost already incurred that is never relevant to a decision

avoidable cost

can be eliminated by choosing one of the alternatives

value chain

all activities needed to develop, produce, sell and service a product

vertical integration

company carries out several activities in its value chain in "house"

make or buy

should a company carry out an activity itself or purchase from outside the company

joint products

two or more products that are produced from a common input

split off point

where you complete processing the single input and have to decide whether to make end products and how many(where joint products can be recognized as individual products)

joint costs

costs that are incurred up to the split-off point

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