Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 17 - Activity-Based Costing - Questions - Page 922: 6


State the formula for computing overhead rates using an activity-based costing system: - An activity-based costing system allocates manufacturing overhead to one or many activity cost pools, then assigns the activity cost pools to the products manufactured by means of cost drivers. - An activity is a task, operation, or procedure that creates costs that are incurred. - A cost pool is a collection of costs that all related to the same activity. - Costs are pooled together in order to determine an activity overhead rate for all the costs incurred by the same activity. - A cost driver is the usage of resources that is driven by the activity. An example of this would be the assembling of a product.

Work Step by Step

Activity based overhead rate is calculated by using following formula: Activity-Based Overhead rate = Estimated Overhead per Activity/Expected use of Cost drivers per Activity
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