Allocate activity costs to products
Apply each pool's rate to the product's driver usage, then check the allocations against the pool total.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.1 covers activity-based costing (ABC), cost drivers, overhead apportionment and allocation, unit cost and selling-price calculations, method comparisons, uses and limitations, and supported decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topic 2.1–2.2 knowledge of fixed and variable costs, overhead absorption, cost-plus pricing and contribution. This A Level pathway compares those methods with activity-based costing.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
After calculating a pool rate, what product data do you need?
What you will learn
- Allocate more than one cost pool to products
- Reconcile product allocations to each pool
- Avoid double counting overhead
Charge products by actual activity use
For each activity, product allocation = driver rate × the product's driver units. Repeat separately for each pool; then add the product's pool allocations. A product can use many machine hours but few set-ups, while another may use the opposite pattern.
Sum product allocations for one pool and compare with the full pool cost. If the totals differ, check missing activity, incorrect rate, driver counts or rounding. Do not allocate a pool twice through both the ABC rate and a separate absorption charge.
Keep pool and product totals distinct
A pool rate is per activity unit; each product's allocation is the total overhead assigned to that product. Divide the product's allocated total by output only when calculating overhead per unit.
If some activity is unused or a capacity cost is treated separately in the question, do not force all cost onto products without explaining the stated approach. Follow the data and requirements provided.
Pause and explain
What should the sum of all product allocations for a fully assigned pool equal?
Worked example
A set-up rate is $500 per set-up. Product A uses 40 set-ups and Product B uses 120. Allocate the pool and reconcile the total.
Show the worked solution
- A receives 40 × $500 = $20,000.
- B receives 120 × $500 = $60,000.
- Total allocation = $80,000, equal to 160 set-ups × $500.
Answer Product A receives $20,000 and Product B $60,000; total assigned is $80,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
The inspection rate is $200. A uses 60 inspections and B uses 180. Allocate the $48,000 pool.
Give me a hint
Multiply each product's inspections by the same rate.
Compare my reasoning
- A = 60 × $200 = $12,000.
- B = 180 × $200 = $36,000.
- $12,000 + $36,000 = $48,000, matching the pool.
A receives $12,000 and B $36,000; the allocation reconciles to $48,000.
Look for these in your work
- Allocate $12,000 to A.
- Allocate $36,000 to B.
- Reconcile to the pool total.
Pool rates are $500 per set-up and $200 per inspection. Product X uses 20 set-ups and 30 inspections. Calculate its total allocation.
Give me a hint
Calculate each activity separately before adding.
Compare my reasoning
- Set-up allocation = 20 × $500 = $10,000.
- Inspection allocation = 30 × $200 = $6,000.
- Total ABC overhead allocated to X = $16,000.
Product X receives $16,000 across the two activity pools.
Look for these in your work
- Calculate the set-up allocation.
- Calculate the inspection allocation.
- Add the pools once to get $16,000.
A spreadsheet allocates $80,000 of set-up overhead to products, but the product allocations sum to $84,000. Give three checks before changing any product cost.
Give me a hint
The difference could arise from duplicated activity, rate rounding or incomplete pool reconciliation.
Compare my reasoning
- Recalculate the pool rate from the original pool cost and total set-ups.
- Check product set-up counts sum to the activity total and whether any product appears twice.
- Review rounding and any separate traditional absorption charge; correct the source and document the reconciliation.
Reconcile the source rate and activity counts, check for duplicate charges and rounding, then correct the evidence-backed cause.
Look for these in your work
- Verify the original pool rate.
- Reconcile product driver counts to total activity.
- Check double counting and rounding before editing allocations.
Common mistakes
- Using total factory activity for each product
- Dividing an allocation by units before totaling every pool
- Charging the same pool once through ABC and again through traditional absorption
What can you explain now?
A product uses 30 inspections at $200 each. What overhead is allocated?
Compare with the explanation
$6,000
Multiply the rate per inspection by the product's 30 inspections.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do you calculate product ABC overhead and how do you check the result?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.