Question

Why does the use of more than one cost pool typically result in more realistic overhead cost estimates?

Answer 1

When using just one cost, which is also known as the traditional approach for allocation of overheads, allocation of overheads is not on the basis of activity level, where the unit cost of a product comes out to be inaccurate, because, in case, any activity is performed is less, there may be high amount of Overhead cost is charged or vice-versa. But when Activity Based Costing (ABC) is applied, then there are more than one cost drivers and overhead cost is allocated on the basis of their activity. Here, each and every overhead cost is being allocated on the basis of their number of activity performed, which is more accurate, reliable and realistic overhead cost estimates.