ABC calculations: allocation of direct costs, use of cost pools and cost drivers to attribute indirect costs to particular products
Activity based costing (ABC) assigns direct costs straight to a product. It then groups indirect costs into cost pools and uses cost drivers to share those costs fairly between products.
Formula
Indirect Cost per Unit = (Cost Driver Rate × Drivers Used by Product) ÷ Units Produced
Real World
Dyson uses ABC to charge machine setup costs based on the number of production runs. Its limited-edition gold vacuum triggers 50 setups for 500 units, absorbing far more setup cost per unit than the standard V15 with 10 setups for 100,000 units.
Exam Focus
Set out a clear table showing each cost pool, its driver, the rate, and the amount charged to each product — structured workings earn method marks.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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