Final answer:
Assigning overhead costs to activity cost pools involves using Activity-Based Costing to distribute costs based on identified cost drivers that reflect the consumption of resources by different activities.
Step-by-step explanation:
To assign overhead costs to activity cost pools, a company needs to undergo a process known as Activity-Based Costing (ABC). The first step is to identify the activities that incur overhead costs within the business operations. Then, these costs get assigned to respective cost pools that represent groups of similar activities. To accurately distribute overhead costs, a cost driver must be identified for each activity cost pool, which is a factor that causes the cost to be incurred.
For example, if a company has a machine setup activity as one of its activities, the cost driver could be the number of machine hours or the number of setups. The total overhead costs related to machine setup would then be divided by the total number of machine hours or setups to determine the rate. Finally, this rate is applied to each product based on the actual machine hours or setups used during production to allocate the overhead costs from the pool to the specific products.
This method ensures that products consume overhead resources in proportion to the resources they actually use, leading to more precise product costing and better decision-making for the company.