Activity cost pool a distinct type of activity for

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Activity Cost Pool : A distinct type of activity. For example, ordering materials or setting up machines. Cost Drivers : Any factors or activities that have a direct cause- effect relationship with the resources consumed.
Image of page 16 ABC Allocation of Overhead ABC allocates overhead costs in two stages : Stage 1 : Overhead costs are allocated to activity cost pools. Stage 2 : The overhead costs allocated to the cost pools is assigned to products using cost drivers. The more complex a product’s manufacturing operation, the more activities and cost drivers likely to be present
Image of page 17 Activities and Related Cost Drivers
Image of page 18 Traditional Costing vs. ABC - Example Atlas Company produces two automotive anti-theft devices: The Boot : a high volume item with sales totaling 25,000 per year The Club : a low volume item with sales totaling 5,000 per year Each product requires 1 hour of direct labour Total annual direct labour hours (DLH) 30,000 The Boot 25,000 The Club 5,000 Expected annual manufacturing overhead costs $900,000 Traditional costing predetermined overhead rate : $900,000/30,000 DLH = $30 per DLH
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