Question

for activity-based costing, What determines how many cost pools a company uses?

Explain using your own wordsand make it easier to understand

Answer 1

Solution:

Activity Based Costing:

Activity Based Costing one of the most important cost analysis tool which helps determine the true picture of the cost. It is use as an analytical tool under advance cost management system. As the name suggest the process helps to analysis the cost as per the activity perform and incurred. The cost should be allocated as per the activity perform.

Let’s explain the same with an example for better understanding. Suppose the total labor cost is $10,000. There are four activities like Activity A, Activity B, Activity C and Activity D. Each activity requires different labor hours. So if the total labor cost is allocated among the activities on the basis of the production of units then it will not reflect the true picture. But under activity based costing the same should be allocated on the basis of the labor hours consume by each activity. This allocation under activity based costing will help to get the true picture of the labor cost for each activity.

Activity Based Costing involves some process or steps. The first step is the making the cost pool. Under this step the cost which will be allocated under the activity based costing, should be identified. Also the basis of the allocation should be determined. After the same the allocation process will be done. This process will help to allocated the cost properly and to get the true picture of the cost.

References:

Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.

Fenn, B., Sangrasi, G. M., Puett, C., Trenouth, L., & Pietzsch, S. (2015). The REFANI Pakistan study—a cluster randomised controlled trial of the effectiveness and cost-effectiveness of cash-based transfer programmes on child nutrition status: study protocol. BMC public health, 15(1), 1044.