![]() ![]() Multiply the number of activity cost drivers by this cost driver rate to get the overhead cost for a particular product.įor example, you’ve set up 5,000 machines, with an overhead of £11,000.Ĭost driver rate = cost pool overhead / cost driver.Divide the total overhead for each cost pool by the appropriate cost driver(s), this is your cost driver rate.Decide which cost drivers apply to each cost pool (eg hours, number of items processed).Work out the total overhead for each cost pool.Group these activities into cost pools, like the examples above.List all the activities that you need to spend money on to create your product.(Overhead for cost pool / cost drivers) X Amount of Activity Cost Driver Step-by-Step Process for the Activity-Based Costing Method Remember that one cost pool can have more than one cost driver.Ī useful broad perspective on this is - activities consume resources (and might be called 'cost objects’ by your accountant) products, customers and manufacturing channels consume activities.įor each product, you’re working out how much its activity consumption costs. Health and Safety Inspections: number of inspections completed.Customer Service: number of customers given assistance.Order processing: number of invoices sent.Machine set up: number of machine setups needed.Administration of purchase-orders to suppliers: number of orders sent. ![]() This tells you the amount of indirect and overhead costs that relate to that particular activity.Įxamples of an Activity Cost Pool and Related Examples of Cost Drivers Cost driver rate – A calculation: cost pool total / cost driver.If this doesn’t happen, then cost isn’t incurred. ![]()
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