CMA Final · Strategic Cost Management

Activity Based Cost Management: formula sheet

Full chapter guide

Key formulas

Cost driver rate: Cost driver rate = Total cost of the activity pool ÷ Total volume of the cost driver; Use the expected or budgeted driver volume for the period, for all products together.
Overhead charged to a product: Overhead charged = Cost driver rate × Quantity of driver used by the product; Repeat for each pool and add the results.
Overhead per unit under ABC: Overhead per unit = Total overhead charged to the product ÷ Units produced; Add direct material and direct labour to get full unit cost.
Traditional overhead absorption rate: Rate = Total overheads ÷ Total base (labour hours or machine hours); Use this for comparison with ABC.
Cost driver rate: Cost driver rate = Total cost of activity pool ÷ Total volume of cost driver; Use the practical or budgeted driver volume the question gives. Calculate one rate per pool.
Overhead assigned to a product: Overhead charged = Σ (Driver rate of pool × Driver units used by the product); Add across all pools. Divide by units produced to get overhead per unit.
Cost per batch-level driver: Cost per setup = Total setup cost ÷ Total number of setups; Batch costs depend on the number of batches, not on units per batch.
Cost hierarchy: Unit-level → Batch-level → Product-level → Facility-level; Only the first three are normally traced to products by drivers. Facility-level costs have no causal driver.
Driver types: Transaction driver = count of events; Duration driver = time taken; Choose a duration driver when activity time differs widely between products.
Cost driver rate: Cost driver rate = Cost of the activity pool ÷ Total quantity of the cost driver; Use the total driver quantity across all products, not just one product.
Overhead charged to a product: Overhead for a product = Σ (Driver rate × Driver units used by the product); Do this for every activity pool, then add the results.
ABC overhead per unit: ABC overhead per unit = Total ABC overhead of the product ÷ Units produced; Divide by units produced, not by units sold, unless the question says otherwise.
Total cost per unit: Cost per unit = Direct material + Direct labour + ABC overhead per unit; Add any other direct cost the question gives.
Traditional overhead rate: Traditional rate = Total overhead ÷ Total volume base (labour hours or machine hours); One rate for all overhead. Used for comparison.
Profit per unit: Profit per unit = Selling price − Cost per unit; Total profit = profit per unit × units sold.
Cross-check: Total overhead absorbed under ABC = Total overhead absorbed under traditional costing; If the two totals differ, there is an arithmetic error.
Cost driver rate: Activity cost driver rate = Cost of activity pool ÷ Total quantity of cost driver; Used to cost each activity before judging whether it adds value.
Cost of non-value-added activities: NVA cost = Σ (Cost driver rate × Driver quantity wasted or not needed); Add up the cost of every NVA activity to show the saving available.
Value-added cost ratio: VA cost ratio = Cost of value-added activities ÷ Total activity cost × 100; Higher is better. Use to compare periods or products. The complement is the NVA share.
Activity efficiency (cycle time): Manufacturing cycle efficiency = Value-added processing time ÷ Total cycle time; Total time = processing + inspection + moving + waiting. A ratio below 1 shows NVA time.
Operational vs strategic ABM: Operational ABM = do things right; Strategic ABM = do the right things; Learn this one-line contrast for theory questions.
Activity demand: Activity volume = Budgeted output ÷ Output per unit of cost driver (or cost driver units per unit of output × budgeted output); Use the cost driver of each activity, for example orders, set-ups or inspections.
Activity based budget cost: Budgeted activity cost = Budgeted driver volume × Cost per driver unit; Total budget = sum of all activity budgets plus any unit-level costs.
Resource requirement: Resources needed = Activity demand ÷ Capacity per resource unit; Round up where resources are indivisible, such as people or machines, and state the assumption.
Capacity cost rate: Capacity cost rate = Cost of capacity supplied ÷ Practical capacity (in time units); Use the cost of the resource department. Practical capacity excludes breaks and unavoidable idle time.
Time equation: Time = β0 + β1X1 + β2X2 + ...; β0 is the standard time. Each X is a driver of extra time and β is the minutes per unit of that driver.
TDABC activity cost: Cost of activity = Capacity cost rate × Time per activity (from time equation); Total cost assigned = rate × total time used.
Cost of unused capacity: Unused capacity cost = Capacity cost rate × (Practical capacity − Time used); Equals cost of capacity supplied less cost assigned to activities.

Quick revision

ABC assigns overhead to activities first, then to products through cost drivers.
Activity rate = cost of the activity pool ÷ total driver volume.
Unit-level activities occur with every unit produced, such as machine hours.
Batch-level activities occur per batch, such as set-ups and material handling.
Product-sustaining activities support a product line, such as design and engineering changes.
Facility-sustaining activities support the whole plant, such as rent and general management, and are hard to trace to products.
ABC usually shifts cost from high-volume simple products to low-volume complex products.
Check: total overhead assigned must equal total overhead incurred.
ABM uses ABC data to remove non-value-adding activities and improve pricing and product mix decisions.
Activity Based Budgeting plans activities and drivers first, then the resources needed.
TDABC uses capacity cost rate per time unit and time equations instead of surveying activity percentages.
Always end a numerical with a short conclusion and recommendation.

Common mistakes

Choosing a volume-based driver such as labour hours for every activity. Fix: Ask what causes the activity cost. Set-up cost follows number of set-ups, not hours.
Confusing cost pool with cost driver. Fix: Pool is the amount of cost collected. Driver is the measure used to spread it. Write both in your table.
Treating setup cost as a unit-level cost and driving it by machine hours. Fix: Setups happen per batch. Use number of setups or setup hours, and classify them as batch-level.
Dividing pool cost by units produced instead of total driver volume. Fix: Always divide by the total quantity of the driver, such as total orders or total inspection hours. Convert to per unit only at the end.
Dividing the pool cost by one product's driver units instead of the total driver units. Fix: Add the driver units of all products first. The rate is pool cost ÷ total driver quantity.
Dividing overhead by units sold instead of units produced, or the reverse, without reading the question. Fix: Overhead is charged on production. Use units produced for cost per unit, then use units sold for profit.
Treating ABM and ABC as the same thing. Fix: Say ABC measures cost; ABM uses that information for decisions and improvement.
Calling inspection or storage value-added because it is necessary. Fix: Apply the customer test. Necessary but non-value-adding activities are still NVA; you reduce them rather than remove them.
Using theoretical capacity instead of practical capacity in the capacity cost rate. Fix: Underline the practical capacity percentage or the deductions in the question and apply them before dividing.
Loading unused capacity cost onto products in TDABC. Fix: Charge only rate × time used to products. Show unused capacity cost as a separate line.

Exam tips

For theory questions, structure the answer as limitation, cause, effect on decisions, then how ABC fixes it.
Always define activity, cost pool and cost driver with one example each. Examiners look for these terms.
In numericals, show the rate for each pool separately and a final check that total overhead is fully charged.
When comparing methods, state clearly which product is over-costed or under-costed and what decision changes.
In case-scenario MCQs, identify the cost driver by asking what makes the cost rise, not what is easy to measure.
In theory questions, give the implementation steps in order and add one line of explanation for each. A bare list loses marks.
For the hierarchy, always give an example activity and a driver for each of the four levels.
In numerical questions, show the driver rate for each pool separately and check that the total absorbed equals the total overhead.