Chapter 4: activity-based costing STEP 2:

i. Assignment of overhead to order xx units

1. predetermined overhead rate (POHR) using Activity Expected X Activity- = Cost

machine hours/DLH etc. = cost use of based assigned
pools cost overhead
Estimated total overhead cost, $ / estimated driver rates
machine hours, DLH etc..

=answer in $ per machine hour, DLH etc.. ii. calculate total overhead assigned

2. use POHR to calculate total overhead &

manufacturing cost (traditional way)

Total overhead = actual hour x POHR

STEP 3: compute total manufacturing cost

3. compute manufacturing cost using ABC method.

STEP 1:

computation of activity-based overhead RATES

Activity Estimated ÷ Expected = Activity-

cost overhead use of based 4. why ABC method is preferred?
pools cost Overhead
 ABC is the preferable costing system for
drivers rate
setting prices because the real costs are more
per
activity accurately reflected.
 The greater accuracy is a result of multiple,
more relevant activity cost drivers under ABC
than the single cost driver used with the
traditional volume-based system.