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Chapter 11

Activity based costing

2.1 Cost pools and cost drivers

Rather than absorbing overheads on a production volume basis ABC firstly allocates
overheads to cost pools before absorbing them into units using cost drivers.

Activity cost pool

 An activity that incurs cost.

 Costs are linked to the activity accurately and from the activity to
the cost unit.

 Knowledge of the activity is key to the application of ABC.

Cost driver

 This is the causal link between the activity and the cost unit.

 Cost drivers describe exactly how the production of units incur
costs within the activity.

 The overhead is linked to the cost unit using a cost driver rate.

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