Do fixed costs have cost drivers?

Asked By: Xiaoxiao Trichet | Last Updated: 24th May, 2020
Category: personal finance financial planning
4.7/5 (665 Views . 31 Votes)
A cost driver is the direct cause of a cost. Fixed costs are costs that remain unchanged regardless of the amount of output a company produces, while variable costs change with production volume. and its effect is on the total cost incurred.

Click to see full answer


Also question is, what is an example of a cost driver?

Examples of cost drivers are as follows: Direct labor hours worked. Number of customer contacts. Number of engineering change orders issued. Number of machine hours used.

Likewise, how do cost drivers affect cost behavior? A cost driver is an output measure of a resource or activity. When the use of a resource or the performance of an activity changes, the level of the cost driver or output measure will also change, causing changes in costs. The sane cost can be direct for one cost object and indirect for other cost objects.

Herein, what is a cost driver rate?

A cost driver rate is the amount of indirect or variable cost assigned to each unit of cost driver activity. For example, you may apply indirect overhead to direct labor hours as $50 dollars per hour.

How do total fixed costs behave?

Fixed costs do not change based on activity. The cost will stay the same in total as long as activity is within the relevant range. Because fixed costs are fixed in total, the per unit rate will change as production changes.

39 Related Question Answers Found

What are some ABC cost drivers?

Requirements for Activity-Based Costing (ABC)
A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

How do you identify cost drivers?

Example of a Cost Allocation Based on Cost Drivers
  1. Total set-up cost = $100,000.
  2. Total number of set-ups = 100.
  3. Cost per set-up = 100,000/100 = $1,000.
  4. Set-up cost associated with product A = 1,000 x 20 = $20,000.
  5. Set-up cost associated with product B = 1,000 x 30 = $30,000.

What do you mean by cost drivers?

A cost driver is the unit of an activity that causes the change in activity's cost. cost driver is any factor which causes a change in the cost of an activity. — Chartered Institute of Management Accountants.

Why are cost drivers important?

A cost driver simplifies the allocation of manufacturing overhead. The correct allocation of manufacturing overhead is important to determine the true cost of a product. Internal management uses the cost of a product to determine the prices of the products they produce.

What are cost behaviors?


Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity. Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases.

Is Machine hours a direct cost?

Indirect manufacturing costs are a manufacturer's production costs other than direct materials and direct labor. In traditional cost accounting, the indirect manufacturing costs are allocated to the products manufactured based on direct labor hours, direct labor costs, or production machine hours.

What makes a good cost driver?

Cost drivers are the elements of a business that cause an overhead cost against the goods manufactured or services provided. Some cost drivers are necessary and unchangeable while others place a high than needed overhead cost against production.

Is Depreciation a fixed cost?

Depreciation is a fixed cost, because it recurs in the same amount per period throughout the useful life of an asset. Depreciation cannot be considered a variable cost, since it does not vary with activity volume. However, there is an exception.

What are the four steps in the cost allocation process?

Four Steps to Calculating Process Costs
  • Step 1 – Collect Direct Spending. In order to calculate a process cost, the first thing you need is to collect the pools of direct spending at the account or sub-account level.
  • Step 2 – Allocate Indirect Spending.
  • Step 3 – Calculate Cost Center Rates.
  • Step 4 – Proper Assignment of Process Rates to Products.

What do you mean by Kaizen costing?


Kaizen costing is a cost reduction system. Yasuhiro Monden defines kaizen costing as "the maintenance of present cost levels for products currently being manufactured via systematic efforts to achieve the desired cost level." The word kaizen is a Japanese word meaning continuous improvement.

What is the cost driver for materials handling?

The cost driver for the material-handling activity is the number of material moves. 4. Under activity-based costing (ABC), the material-handling costs allocated to one mirror would be what amount? The cost driver for the material-handling activity is the number of material moves.

What are cost drivers and cost pools?

Activity cost pools are groups of individual costs influenced by the same cost drivers , which are activities that control the amount of costs incurred.

What are structural cost drivers?

Structural cost drivers are determined from a company's choices regarding its underlying economic structure. Key cost drivers at this level include the organization's scale and scope, the level and type of technology, and the organization's product strategy with respect to the variety of products offered to customers.

What are the steps in Activity Based Costing?

The five steps are as follows:
  • Identify costly activities required to complete products.
  • Assign overhead costs to the activities identified in step 1.
  • Identify the cost driver for each activity.
  • Calculate a predetermined overhead rate for each activity.
  • Allocate overhead costs to products.

What do Variable costs consist of?


A variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging.

How do you calculate activity cost?

Formula. An activity-based costing rate is calculated by assigning indirect costs to a cost pool, adding the costs included in that cost pool together, then dividing the cost pool total by the cost driver.

Why is an understanding of cost Behaviour important?

Knowledge of cost behavior allows a manager to assess changes in costs that result from changes in activity. This allows a manager to assess the effects of choices that change activity. For example , if excess capacity exists , bids that minimally cover variable costs may be totally appropriate.