COMMERCE 2AB3 Chapter Notes - Chapter 5: Cost Driver, Newtype, Customer Development
7 Mar 2017
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Document Summary
Activity-based costing (abc): an overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by using cost drivers that represent the activities used. Activity: any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service. Activity cost pool: the overhead cost allocated to a distinct type of activity or related activities. Cost driver: any factor or activity that has a direct cause effect relationship with the resources consumed. In abc, companies use cost drivers to assign activity cost pools to products or services. The reasoning behind abc cost allocation is simple: products consume activities, and activities consume resources. Identify and classify activities and allocate overhead to cost pools (step 1) To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the overhead costs in the cost pool.
