Managerial Accounting

Business

Quiz 5 :
Activity-Based Costing and Management

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Quiz 5 :
Activity-Based Costing and Management

Volume-based product-costing system operates with only a single predetermined overhead rate. All manufacturing-overhead costs are combined into one cost pool, and they are applied to products on the basis of a single cost driver that is closely related to production. The most frequently operated cost drivers in product-costing systems are directed-labor, direct-labor dollars, machine hours, and units of production.

Activity-based costing system is operated in a two-stage process. It assigns the costs to concerned products. In stage one, activity-cost pools are established and in stage two a cost driver is identified for each activity-cost pool. Then the costs in each pool are assigned to each product line in appropriate proportion to the amount of the cost driver consumed by each product line.

Activity-based costing system is operated in a two-stage process. It assigns the costs to the concerned products. In stage one, activity-cost pools are established and in stage two a cost driver is identified for each activity-cost pool. The manufacturing overhead is aggregate of many activities. Hence, it is allocated to the products on the basis of specific cost drivers of the activities.