Activity rates are determined by
a. dividing the cost budgeted for each activity pool by the actual activity base for that pool
b. dividing the actual cost for each activity pool by the actual activity base for that pool
c. dividing the cost budgeted for each activity pool by the estimated activity base for that pool
d. dividing the actual cost for each activity pool by the estimated activity base for that pool
The Correct Answer and Explanation is :
The correct answer is:
c. dividing the cost budgeted for each activity pool by the estimated activity base for that pool
Explanation:
Activity-based costing (ABC) is a method that assigns overhead and indirect costs to specific activities that drive those costs. This method uses various activity cost pools (groups of costs related to a specific activity) and assigns costs based on actual activity levels.
To determine the activity rate for each activity pool, we follow these steps:
- Budgeted Costs: For each activity, a budgeted (or estimated) cost is determined. These are typically the expected costs to carry out a particular activity, such as machine setup, inspection, or shipping.
- Estimated Activity Base: This is the estimated measure of activity that will drive the costs in that pool, such as the number of machine hours, labor hours, or units produced. It represents how much of the activity is expected to occur during the period.
- Activity Rate: The activity rate is calculated by dividing the budgeted cost for the activity by the estimated activity base. The resulting rate tells you how much cost is associated with a unit of activity. It is used to allocate costs to specific products or services based on their consumption of the activity. [
\text{Activity Rate} = \frac{\text{Budgeted Cost}}{\text{Estimated Activity Base}}
]
This rate is critical for accurately allocating overhead costs to products or services, ensuring that more complex products or those requiring more activity resources absorb a greater share of the costs.
- Option a refers to dividing budgeted cost by actual activity, which would not be accurate for determining rates used in ABC.
- Option b refers to actual costs, which are only used when calculating actual overhead allocation, not the rate.
- Option d uses actual cost with estimated activity, which again is not correct for rate calculation.
The key here is using budgeted costs and estimated activity base, as those are the basis of planning and cost allocation.
I will now generate the image explaining this process.
Here is the visual diagram illustrating the process of determining the activity rate in Activity-Based Costing (ABC). It shows the relationship between budgeted costs, the estimated activity base, and the resulting activity rate formula. Let me know if you need further explanation or adjustments!