Question

write a short essay and define the following :

1-Activity Cost Pools

2- Cost Drivers

3- Cost Drivers Quantity

4- ABC

5- Activity Rate

please provide your answers with APA style referencing

Answer 1

1)

Activity cost pool:

Pool refers to the combination. An activity cost pool refers to the aggregate of all the cost incurred in performing a business task. It calculates the cumulative cost of performing similar activities. It includes fixed costs and variable costs.

For example: In a manufacturing concern, the operations are divided in three activities. The total cost of these three activities is $40,000. Using the activity cost pool, there are cost drivers of machine hours, labor hours, maintenance hours and number of units produced. The total cost of $40,000 will be divided in three activities according to these cost drivers.

2)

Cost driver:

The total cost of a product gets changed because of any factor or unit of activity. This factor or unit of activity which causes a change in the cost of product is called cost driver. In activity-based costing, the cost driver influences the maintenance, labor cost and variable cost.

For example: Indirect cost for maintenance, number of machine hours, number of sale personnel, number of advertisements.

3)

Cost driver quantity:

Factor or unit of activity which causes a change in the cost of product is called cost driver. Machine hours, number of advertisements, number of sale personnel is cost drivers of an activity. These numbers are called the quantity of cost drivers.

For example:

If a machine is runs for 20 hours in an activity, then 20 is the quantity of cost driver.

4)

ABC:

ABC is a method of costing of products. It is referred to activity-based costing. Under this method of costing, the activities involved in the production of goods & services are identified and cost is assigned to each activity differently.

Cost is assigned as follows under this method:

• All the activities in production of product is identified.
• The activities are divided into cost pools which includes individual cost of the activities involved.
• Cost drivers is assigned to each cost pools such as units or hours.
• Cost driver rate is calculated by dividing the total overhead in each cost pool by the total cost drivers.
• Multiply the cost driver rate by the number of cost drivers.

5)

Activity rate:

Activity rate is the rate of the activities involved in the manufacturing of a product. Number of machine hours or units produced are calculated for each activity. These are called cost drivers. Activity rate is calculated by dividing the total overhead cost by the total cost drivers.

For example:

If a machine is run for 10 hours and the cost of activity is $10,000 then activity rate is: $10,000/10 = $1,000.