Describe the two-step process by which costs are allocated in an ABC system
Costs must be accumulated in the general ledger and subledger accounts before they can be allocated. However, instead of being allocated using a single volume-based cost driver to factory overhead (as is done in a traditional costing system), these costs are first accumulated in activity center cost pools using cost drivers that are related closely to the activity being measured. An activity center is any part of the production or service function for which management wants specific cost reporting.
After accumulation, costs are allocated out of the activity center cost pools and assigned to products and services by the use of activity drivers. These activity drivers measure the demands placed on activities and the resources consumed by products and services.
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