Understand the key formulae involved with ABC systems and be able to explain the inputs to...

Understand the key formulae involved with ABC systems and be able to explain the inputs to these formulae.

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Expert Solution

Before discussing the formula of ABC SYSTEMS

First understand definetion =ABC means Activity Based Costing= allocation of cost (charges and expenses) to different divisions according to their actual use.we use this mathord to determine actual profit.

Activity-Based Costing Formula = Cost Pool in Total / Cost Driver

inputs of yhis formula

Total Cost Pool: This is an item for which measurement of the cost would require e.g. a product,service cost etc
Cost Driver: It is a factor that will cause a change in the cost of that activity. There are 2 kinds of cost driver:
- 1) Resource Cost Driver: It is a measure of the number of resources that shall be consumed by an activity. This will be used to assign the cost of a resource to an activity. E.g. Electricity, Staff wages, Advertising, etc.
- 2) Activity Cost Driver: This is the measure of the intensity of demand and the frequency that is placed on the activities by the cost pools. It will be used to assign the activity costs to a product or a customer. E.g. Material ordering costs, Machine set up costs, Inspection and testing charges, Material handling and storing costs, etc.

ekkarill92 answered 1 year ago

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