## Key Terms in ABC
### A. Activity
An event that incurs cost. In ABC the number of activities is much greater than under traditional overhead systems. Examples: production schedule changes, customer liaison, purchasing, production process set-up, quality control, material handling, maintenance.
### B. Cost Pool
- A grouping of individual cost items that share the same cause-and-effect relationship (also called a 'cost bucket').
- Overheads are related to activities and grouped into cost pools.
- Support activities are then spread across primary activities on a suitable base reflecting use of the support activity.
- Example of a cost pool: Machine set-up.
### C. Cost Drivers
A factor that causes a change in the cost of an activity — it determines the amount of cost incurred for a specific activity/process. Two categories:
| Category | Meaning |
|---|---|
| Resource Cost Driver | A measure of the quantity of resources consumed by an activity. Assigns the cost of a resource to an activity / cost pool. |
| Activity Cost Driver | A measure of the frequency and intensity of demand placed on activities by cost objects. Assigns activity costs to cost objects. |
Examples of cost drivers by function:
| Function / Activity | Cost Driver |
|---|---|
| Research & Development | No. of research projects; personnel hours on a project |
| Design of products/services/procedures | No. of products in design; no. of parts per product; engineering hours |
| Customer Service | No. of service calls; no. of products serviced; servicing hours |
| Marketing | No. of advertisements; no. of sales personnel; sales revenue |
| Distribution | No. of units distributed; no. of customers |
### Cost Object
The item for which cost measurement is required — e.g., a unit of product, a service, a customer category, a geographical location.
### D. Cost Driver Rate
A rate used to allocate indirect (overhead) costs to products/services/cost objects based on their usage of an activity.
> Formula: `Activity Cost Driver Rate = Total Cost of Activity (Cost Pool) ÷ Activity Driver (Cost Driver Quantity)₹
The cost driver rate is then multiplied by the amount of the activity each product/cost object consumes.