Question

How Activity based costing evaluate costs? And how a small e-commerce business allocate manufacturing overheads using activity based costing.

Answer 1

Activity based costing identifies the activities in the business and allocate the cost to the products based on the actual consumption of the cost by the product. ABC method instead of taking a single overhead rate as in traditional costing method, calculate different overhead rate for each activity and based on the actual consumption distribute the overheads to the acitivites.

Steps to allocate overheads using  Activity Based Costing -

1) Firstly identify all the activities which are required to complete the product.

2) Create a cost pool wherein all the cost are included in order to finish the product.

3) Identify the cost driver which will be basis of allocation of indirect cost to each activity.

4) Now with the help of above information , calculate the overhead rate of the activity

5) By multiplying the rate with the number of cost driver used in the activity we can allocate the cost.