Acct 102 Chap 6 - Activity centers are cost centers...

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Acct 102 – Chap 6 Activities are measures an organization undertakes to accomplish its mission. Activity-based costing (ABC) is a two-stage allocation process that employs a variety of cost drivers. In the first stage, ABC assigns costs to pools according to the activities that cause the costs to be incurred. In the second stage, the costs in the activity cost pools are assigned to products. The cost drivers chosen for each cost pool are drivers that measure the demand placed on that cost pool by the cost object. Activity-based cost drivers are measures of activities that cause cost to be incurred, such as number of setups, percentage of use, and pounds of material delivered; using such measures as allocation bases can improve the accuracy of cost allocations in business environments where overhead costs are not driven by volume.
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Unformatted text preview: Activity centers are cost centers composed of operating activities with similar characteristics; pooling indirect costs into activity centers reduces record-keeping costs by allowing allocations based on a common cost driver for each center. Company-wide allocation rate is based on a single measure of volume, such as direct labor-hours, and is used to allocate all overhead cost to the company’s products or other cost objects. Cost pools are many individual costs that have been accumulated into a single total for the purposes of allocation . Volume-based cost drivers are measures of volume such as labor-hours, machine hours, or quantities of materials that are highly correlated with unit-level overhead costs. They serve as bases for allocating unit-level overhead costs....
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