An activity-based costing system uses which of the following procedures? Question 7 options: 1) Overhead costs are traced to departments, then costs are traced to products. 2) Overhead costs are traced to activities, then costs are traced to products. 3) Overhead costs are traced directly to products. 4) All overhead costs are expensed as incurred.

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Business

Jayda Fletcher

21 March, 15:32

An activity-based costing system uses which of the following procedures? Question 7 options: 1) Overhead costs are traced to departments, then costs are traced to products. 2) Overhead costs are traced to activities, then costs are traced to products. 3) Overhead costs are traced directly to products. 4) All overhead costs are expensed as incurred.

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Kipper · Answer 1

2) Overhead costs are traced to activities, then costs are traced to products.

Explanation:

Under activity based costing, all the costs which is not directly related to the product, or cannot be directly allocated based on number of units, are identified and then allocated based on the activity ratio.

As for example the factory rent is for entire factory producing 3 types of product. It shall be allocated among the three products on the basis of area used by them, rather than common overhead rate based on machine hour, as rent is directly related to area.

Therefore for each overhead costs activities are identified, and then based on such activities cost is allocated.