Quiz 9: Activity-Based Costing


Examples of cost drivers commonly used to allocate overhead cost to products and services: Activity cost (Cost pool) and cost driver are the two important terms used in Activity Based Costing. A cost driver is a base by which an activity's costs are allocated. img

In the plant wide allocation method, the cost poll is the total plant. In this method only one overhead allocation rate is used to products for all departments in a particular plant to allocate overheads. A single rate is used for entire plant to determine cost to an entire factory or multi department segment or any other segment. This method not only used in manufacturing but also in non-manufacturing organization. In department allocation method, a company has a different cost pool for every department it has. Therefore, company also determines a different allocation rate for each and every department. Under this method, separate cost pool would be existed for each production department. Therefore, product cost would be different when used plant wide allocation rates and departmental wide allocation rates.

Direct Labor: These are wages to the laborer that have contribution in the production of the company. These people help in converting the raw material into the finished products. These people should efficient as well as effective in their work to achieve the goals of the company and bring down their cost as more as possible. Overheads: Overheads expenses are the costs required to produce the products and services. Overheads have been incurred in production process and in provide services. So, calculation of overheads is required to achieve precise cost of product and service. Overheads allocation is a subject that provides knowledge to take effective and efficient decision for cost assignation, control, ascertainment of profitability and reporting. Multiple products would be produced by most companies. In order to determine the differences in complexity of use of resources, simply adding the products or companies would not work-out. For example, let us assume a company that produces school buses and pens. For the company, it would be incorrect to allocate the overhead costs on the basis of units, as the overhead for school bus and pen are not same.

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