Which sequence correctly describes steps for ABC overhead recovery?

Which sequence correctly describes steps for ABC overhead recovery?

• A. Group production overheads into cost pools; Calculate cost driver rates; Identify cost drivers; Absorb overheads based on demand; Calculate overhead cost per unit
• B. Group production overheads into cost pools; Identify cost drivers; Absorb overheads based on demand; Calculate cost driver rates; Calculate overhead cost per unit
• C. Group production overheads into cost pools; Identify cost drivers; Calculate cost driver rates; Absorb overheads based on demand; Calculate overhead cost per unit
• D. Identify cost drivers; Group production overheads into cost pools; Calculate cost driver rates; Absorb overheads based on demand; Calculate overhead cost per unit

Answer: (C)

In ABC overhead recovery, you allocate costs by linking activity costs to products through cost pools and cost drivers. Start by grouping production overheads into cost pools so you can see what you’re allocating and keep related costs together. Next, identify the cost drivers for each pool, because these drivers show how each pool’s costs are actually consumed by different products. Then calculate the cost driver rates by dividing the total in each pool by the total units of the corresponding driver, giving a rate per unit of driver usage. Absorb or apply those overheads to products using the appropriate driver quantities, i.e., multiply the driver usage of each product by the respective pool rate. Finally, sum the absorbed overheads to determine the overhead cost per unit. This sequence makes sense because you can’t assign costs or compute rates without first organizing the costs into pools and then linking those pools to the products through drivers.

In ABC overhead recovery, you allocate costs by linking activity costs to products through cost pools and cost drivers. Start by grouping production overheads into cost pools so you can see what you’re allocating and keep related costs together. Next, identify the cost drivers for each pool, because these drivers show how each pool’s costs are actually consumed by different products. Then calculate the cost driver rates by dividing the total in each pool by the total units of the corresponding driver, giving a rate per unit of driver usage. Absorb or apply those overheads to products using the appropriate driver quantities, i.e., multiply the driver usage of each product by the respective pool rate. Finally, sum the absorbed overheads to determine the overhead cost per unit.

This sequence makes sense because you can’t assign costs or compute rates without first organizing the costs into pools and then linking those pools to the products through drivers.