Identifying Activity-Based Cost Pools & Drivers

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  • 0:04 Activity-Based Costing
  • 0:37 Cost Drivers
  • 1:00 Cost Pools
  • 1:39 Why It's Useful
  • 2:09 Lesson Summary
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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.

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