Page 10 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 1

The ABC procedure

Identify the organisation’s major activities. A suitable rule of thumb
is to apply the 80/20 rule: identify the 20% of activities that generate
80% of the overheads, and analyse these in detail.

Estimate the cost associated with performing each activity. These
costs are collected into cost pools.

Identify the factors that influence the cost pools: cost drivers. For

example, the number of set-ups will influence the cost of setting up
machinery.

Calculate a cost driver rate = (Cost pool/level of cost drivers)

Charge the overheads to the products by applying the cost driver

rates to the activity usage of the products.

Illustrations and further practice

Now read the ‘Favourable Conditions for ABC’ illustration from Chapter 1 and
attempt example 1 ‘I Co’ and example 2 ‘Manufacturing business’.

4