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Overhead allocation using ABC

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CIMA Official Terminology describes activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects. The latter use cost drivers to attach activity costs to outputs.

ABC

What are Activity Pools and Cost Drivers?

Activity Pools

  • Purchase Orders
  • Machine Set Ups
  • Packaging

Cost Drivers

  • Number of Purchase Orders
  • Number of Machine Set Ups
  • Number of items to package

What would the traditional methods of allocation have been?

  • Direct Labour Hours
  • Machine Hours
  • Floor Area

Using Activity Based Costing can produce very different results to Traditional Methods, click here for an example

steve@bicknells.net


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