Identifying Activity-Based Cost Pools & Drivers

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Allocating Overhead in Activity-Based Costing Systems

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 Activity-Based Costing
  • 0:37 Cost Drivers
  • 1:00 Cost Pools
  • 1:39 Why It's Useful
  • 2:09 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed
Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn about the usefulness of defining the activities needed in order to make your product. You'll see how activity-based cost helps you calculate a more accurate overhead cost.

Activity-Based Costing

In this lesson, we'll talk about the activity-based costing method. This method calculates your overhead by taking into consideration all the activities that are involved in the making of a product. For example, say you are in the business of making ice cream. What activities are needed in order to make the ice cream? You need not only materials, but also machines and employees. All of these different elements factor into your overhead cost. With the activity-based costing system, you are able to include all of these costs into your overhead calculation.

Cost Drivers

You begin the calculation by listing all the activities that cost you money to make your product. These are called cost drivers. For your ice cream making business, your cost drivers might include:

  • Setting up the ice cream making machine
  • Buying all the ingredients
  • Buying all the toppings
  • Paying the necessary amount of employees
  • Paying the business rent, along with the utilities

Cost Pools

Once you've listed your various cost drivers, you can now separate them into groups of related costs. These groups are called your cost pools. For example, setting up the ice cream making machine is a part of the Machine Setup cost pool. Buying all the ingredients and toppings can be part of the Materials cost pool. Paying the necessary number of employees can be part of the Personnel cost pool. Paying the business rent along with the utilities can be part of the Office Expenses cost pool. You'll want to create a table so you can easily see your various cost pools and what the cost drivers are for each of them.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support