AAT Level 3 Management Accounting Techniques (MATS) Practice Test

Once overheads have been grouped into cost pools and their drivers identified, the next step is to translate those budgets into a usable price for each driver. This means calculating the cost driver rates by dividing the budgeted overhead for each pool by the budgeted level of its driver. These rates become the amounts used to apply or absorb overheads to products or services based on actual consumption of each driver. For example, if a pool has budgeted overhead of £120,000 and the driver is 24,000 machine hours, the rate is £5 per machine hour. When actual hours are known, you multiply by the rate to allocate overhead accordingly. Absorbing overheads based on demand is something you do after the rates exist; production quantity is not what creates the rate in ABC, and using a single overhead rate contradicts the multiple-rate approach of activity-based costing.