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CMA Intermediate · Management Accounting · Activity Based Costing

Which of the following correctly lists the usual sequence of steps when implementing Activity Based Costing?

The correct sequence is to identify activities, assign overheads to activity cost pools, choose a cost driver for each pool, compute the rate per driver unit, and then apply the cost to products according to their driver usage. Rates cannot be computed before pools and drivers exist.

  1. AIdentify activities, assign overheads to activity cost pools, select cost drivers, compute rate per driver, apply to productsCorrect
  2. BCompute rate per driver, identify activities, apply to products, select cost drivers
  3. CApply overheads to products on direct labour hours, identify activities, then select cost drivers
  4. DSelect cost drivers, apply overheads to products, then identify activities and form cost pools

Explanation

ABC first identifies the activities, then collects overhead costs into activity cost pools, selects a cost driver for each pool, calculates the rate per unit of driver, and finally charges products by their driver consumption. The other sequences compute rates or apply costs before the activities and drivers are known.

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