Cost Management Systems zThe Problem with Traditional, Volume-Based Product-Costing Systems: They assign costs to products based on a single activity driver related to volume. The costs are spread across products like peanut butter based on the volume of products. Tend to over-cost the high volume products and under-cost the complex, low volume products.

Activity-Based Costing zABC systems assign overhead costs to products or services using a two-stage process that focuses on activities. yStage One: Assign overhead costs to activity cost pools. yStage Two: Identify appropriate cost drivers for each cost pool and allocate overhead costs based on proportion of cost driver consumed by each product line.

Stage One: ABC system There should be approximately 8 to 10 cost pools for the ABC system to be effective. A general rule of fingers (not just thumb): One cost pool for each of your ten fingers.

Stage Two: ABC system zStage Two: Identification of cost drivers and allocation of overhead cost. yIdentification of Cost Drivers: A cost driver is a characteristic of an event or activity that results in the incurrence of costs. xDegree of correlation between the consumption of the activity and consumption of the cost driver. xCost of measurement (implementation and maintenance) must not exceed the cost benefit of the ABC system. Limit the number of drivers to approximately ten. xBehavioral effects that the ABC system has on the decision making of managers must be considered before implementing a cost driver. yAllocation of overhead costs: xThe pool rate is the cost per unit of the cost driver for a particular activity cost pool. xA transaction-based costing system identifies multiple cost drivers and assigns costs to products on the basis of the number of transactions they generate for the cost drivers.