Activity-based costing allocates overhead to activity cost pools, and it then as

Question

Activity-based costing

allocates overhead to activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers.

assigns activity cost pools to products and services, then allocates overhead back to the activity cost pools.

allocates overhead directly to products and services based on activity levels.

accumulates overhead in one cost pool, then assigns the overhead to products and services by means of a cost driver.

allocates overhead to activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers.

Explanation / Answer

In activity based costing, indirect overheads like inspection on products , maintenance salaries or other expenses that could not be allocated in a traditional cost accounting method , are allocated more effectively to products and services. The first step is identification of activities , second step is to create pools of several activities which measures the total overhead in each pool. In the third step, cost drivers are identified as to what drives the activity. In the fourth step, the quantity of activity across all departments are used to come at an average rate for that particular activity. After determining the average rate , we multiply the driver quantity for every product with the average rate.

By the above definition , it is clear that activity cost pools are not re allocated to the same activity cost pools and there are different pools for every activity. So Option 2 and Option 4 are invalid.

Now, though cost drivers are used for allocating overheads, the allocations is done to a particular product or department and not to the activity cost pool itself. Activity cost pool is nothing but the sum total of all the expenses of a particular type. For eg: Ordering costs. hence option 1 is invalid.

Now, activity costing allocated overhead on the basis of activity levels is Valid. This is because suppose I have ordering costs of $100 and I have made ten orders so my allocation would depend on the average rate of $10. This ten order is nothing but the activity level

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.