Tracing overhead costs to activities involves dividing overhead costs into:Cost poolsPool rateCost driversOverhead rates

Tracing overhead costs to activities involves the following steps:

1. Cost Pools: This is the first step where you group similar types of overhead costs together. For example, all costs related to manufacturing might be grouped into one cost pool, while all costs related to administration might be grouped into another.

2. Cost Drivers: Once you have your cost pools, you need to identify the cost drivers for each pool. A cost driver is the factor that causes the cost to change. For example, the cost driver for a manufacturing cost pool might be the number of units produced.

3. Pool Rate: After identifying the cost drivers, you calculate the pool rate. This is done by dividing the total cost in each pool by the total amount of the cost driver. For example, if the total manufacturing cost is $10,000 and the total number of units produced is 1,000, the pool rate would be$10 per unit.

4. Overhead Rates: Finally, you apply the pool rate to the cost drivers to allocate the overhead costs. Using the previous example, if you produced 500 units, the allocated manufacturing overhead would be $5,000 (500 units x$10 per unit).

This process allows you to accurately allocate overhead costs to the products or services that actually caused those costs, providing a more accurate picture of product or service cost and profitability.