In a 4-5 page paper, discuss the following:
- The importance of cost pools and drivers and their application in the ABC method.
- Give an example of activity-based costing methods by creating a fictitious company. Include a cost analysis.
- Discuss the 2-3 advantages of the ABC method.
- Be sure that the paper has no spelling or grammatical errors.
Explanation & Answer
Running Header: ACTIVITY-BASED COSTING
Cost pool entails groups of individual cost that allocate production overheads to
production units. Therefore, cost pool includes production and maintenance costs which are then
used to make cost allocations and the final financial decisions. Also, cost pools take part in
Activity Based costing to allot costs to various activities. Cost drivers help in assigning overhead
costs to the produced units and involve such units of an activity that can cause change to it. Cost
tools are important to a business because by analyzing all costs in a business activity, a more
informed decision of the business can be made (DRURY, 2013).
Many companies in the manufacturing category use different costing techniques to
determine the cost of producing each product. One of the most used techniques is the Activity
based costing method commonly known as ABC method. Cost tools and drivers play a
significant role in the activity-based method. One importance of the cost drivers is that they give
a chance to managers to analyze with accuracy what drives the cost of a certain activity and
hence appropriate measures taken. Activity based costing uses some arbitrary percentage
allocation strategies which can also be referred to as indirect costs (Horngren, 2009).
There are some evident benefits of the activity b...
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