Question

The last step in activity-based costing is to

a. identify the cost driver that has a strong correlation to the activity cost pool.
b. assign overhead costs to products, using overhead rates determined for each cost pool.
c. compute the activity-based overhead rate per cost driver.
d. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.

Answer 1

Activity-based costing concludes by assigning overhead costs to products using predetermine rates for each cost pool. Prior steps involve identifying activities, cost pools, cost drivers, and calculating rates based on these factors. These are informed by detailed cost analyses, including fixed costs, variable costs, and various averages and marginal costs.

Step-by-step explanation:

Understanding Activity-Based Costing

The last step in activity-based costing (ABC) involves assigning overhead costs to products. This step utilizes the overhead rates determined for each cost pool, which were calculated in earlier steps. Here is a breakdown of what the ABC process might include:

1. Identify the activities required to produce a product and group them into cost pools.
2. Determine the total costs for each cost pool, which can include both fixed and variable costs.
3. Identify cost drivers for each cost pool. Cost drivers are factors that cause the cost of an activity to go up or down.
4. Calculate the activity-based overhead rate by dividing the total cost for each cost pool by the total amount of the cost driver (e.g., machine hours).
5. Apply overhead to products using the calculated overhead rates and the actual amount of cost drivers consumed by each product.

Throughout this process, mathematical models and cost analyses (like those involving fixed cost, marginal cost, average total cost, and average variable cost) can provide valuable insights and help in efficiently assigning costs.