Final answer:
The first step in developing an activity-based costing system for a service company is to identify and classify activities and allocate overhead to cost pools, before moving on to identifying cost drivers, computing overhead rates, and assigning overhead costs to products based on activity consumption.
Step-by-step explanation:
The first step in the development of an activity-based costing system for a service company is to identify and classify activities and allocate overhead to cost pools. This process involves examining the various tasks that the company performs to provide its services, grouping similar activities into cost pools, and then allocating overhead costs accordingly.
The aim is to allocate costs based on the actual consumption of resources by different activities, rather than using a broad-based allocation method.
After identifying and classifying activities, the subsequent steps would include identifying cost drivers associated with each activity, computing overhead rates, and finally assigning the overhead costs to products or services based on their utilization of those activities. By understanding the relationship between production, costs, and activities, a firm can make better cost management decisions and improve profitability.
Option (a) Identify and classify activities and allocate overhead to cost pools is therefore the correct answer.