Page 29 - P1 Integrated Workbook STUDENT 2018
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Activity based costing
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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