Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase.Īs an example to calculate the per unit cost for the purchasing department, the total costs of the purchasing department are divided by the number of purchase orders. These cost categories are called activity cost pools. Each overhead cost, whether variable or fixed, is assigned to a category of costs. Activity‐based costing assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. In such companies, activity‐based costing (ABC) is used to allocate overhead costs to jobs or functions. ![]() ![]() However, in some companies, new technologies have changed the manufacturing environment such that the number of hours worked or dollars earned by employees are no longer good indicators of how much overhead will be needed to complete a job or process products through a particular function. Activity-Based Costing Activities Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars.
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