Question

1. What is an overhead consumption ratio?
2. What is activity-based product costing?
3. Explain how costs are assigned to activities.
4. Cite and give credit to the author that you are citing

Answer 1

Overhead consumption ratio is a ratio which is derived based on the cost driver consumed for the product to be manufactured. This ratio helps in overhead allocation to the product. This ratio is widely computed in Activity based costing for allocation of overheads as per ratio of activities consumed in manufacture of products

Activity based costing method is a method of overhead allocation to products or services. It is an improved method and technique of overhead allocation to products or process compared to traditional method of costing. In traditional method of overhead allocation labor hours or machine hours are used to allocate the overheads. Activity based costing method allocates overheads based on activities consumed rather than irrational way of allocating overheads since all overheads may not be driven by one single cost driver. Some of the activity cost drivers used by ABC method to allocate overheads includes like set ups, purchase orders, quality inspections, material handling etc

The activities are studied in the ABC Costing implementation and they are pooled into a cost pool. The activity cost pool is assigned with all the cost incurred for that activities belonging to that pool. For example : Material handling is an activity cost pool, All costs incurred in this activity are added to the cost pool for example : Material unloading charges, manpower cost, supervisor cost, Forklift charges, material movement charges, etc