Activity rate
Activity rate is the cost per unit of a cost driver in ABC, found by dividing a budgeted activity pool's total cost by its budgeted driver quantity; it assigns overhead to products in proportion to their actual driver consumption.
FrameworkActivity-based costing
See it move
Activity-based costing charges a set-up pool of €240,000 across 3,000 budgeted set-ups, giving an activity rate of €80 per set-up. A product requiring ten set-ups is charged 10 × €80, or €800, in overhead — a figure that tracks how many set-ups it actually causes, not how many labour hours it happens to consume.
The formula
Variables
- Activity rate (cost per unit of the cost driver) (€ per driver unit)
- Budgeted cost of the activity cost pool for the period (€)
- Budgeted quantity of the cost driver for that pool (driver units (e.g. number of set-ups, pu)
Applying this rate to each product's actual driver consumption assigns pool overhead to products in proportion to the activities they use.
Check yourself
A furniture manufacturer runs an ABC system. Its machine set-up activity pool has budgeted annual costs of €180,000 and 4,500 budgeted set-ups. What is the purpose of dividing these two figures?