Page 33 - Microsoft Word - 00 Prelims.docx
P. 33
Advanced Costing Methods
Activity Based Costing – steps:
Group production overheads into activities, according to how they are
1 driven.
A cost pool is an activity which consumes resources and for which
overhead costs are identified and allocated.
2 Identify cost drivers for each activity.
A cost driver is a factor that influences (or drives) the level of cost.
3 Calculate an overhead absorption rate (OAR) for each activity.
The OAR for each activity is calculated in the same way as the
absorption costing OAR.
4 Absorb activity costs into products.
The activity costs should be absorbed back into the individual
products.
27
