Question

Activity-based costing requires four steps. List the four steps in the order they are performed.

Short answer

The four steps in ABC are identifying activities, estimating their amount and allocation base, computing predetermined rate, and allocating overhead costs.

Step-by-step solution

Activity-based costing

Activity-based costing is a costing system in which the cost of activities is first determined. Then on the basis of such cost, the total cost of the product or services is determined.

Thus in the case of ABC, the overhead is segregated into different activities and then the activity costs are allocated based on an allocation base.

Four steps in activity-based costing

The listing of four steps in activity-based costing is as follows –

a) Identify activities and estimate their total indirect costs

b) Identifying the allocation base and estimating the total quantity for each allocation base

c) To compute a predetermined overhead allocation rate for each activity

d) Allocating indirect costs to cost objects