Chapter 1 Activity Based Costing

Question 1

What are the steps to follow

Answer 1

Identify the major activities that give rise to overheads e.g. machining

Calculate the total cost for each activity – the cost Pool

Determine what causes the cost of each activity-cost driver e.g. machine hours

Calculate an absorption rate for each cost driver

Calculate the total overhead cost for each product manufactured

Calculate the overhead cost per each unit for each product

Question 2

Advantages with activity based costing

Answer 2

With absorption costing in example one remember that the total overheads were $190,000 and we absorbed using labour hour however the problem here is that it doesn’t consider what’s the overheads are for example there may be dispatching receiving or set up costs involved and if one of the products has less production it is unfair to give them the same costs as the others

Question 3

Advantages with activity based costing

Answer 3

Focus his attention on what causes overheads which can lead to cost to cost savings.

Question 4

Problems with activity based costing

Answer 4

Not always possible to determine the cost driver which is what causes the cost. For example rent is an overhead but what causes the cost is not very clear

The solution would be to use activity based costing where possible and were not possible for example with rents use traditional costing methods