What are cost drivers in ABC costing?

Asked By: Iosune Frechina | Last Updated: 20th June, 2020
Category: personal finance financial planning
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In activity-based costing (ABC), an activity cost driver influences the costs of labor, maintenance, or other variable costs. Cost drivers are essential in ABC, a branch of managerial accounting that allocates the indirect costs, or overheads, of an activity.

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Accordingly, what is a cost driver give three examples?

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.

Subsequently, question is, what is cost pool in ABC costing? A cost pool is a grouping of individual costs, typically by department or service center. Cost pools are commonly used for the allocation of factory overhead to units of production, as required by several accounting frameworks. They are also used in activity-based costing to allocate costs to activities.

Furthermore, what are cost drivers in accounting?

cost driver is any factor which causes a change in the cost of an activity. — Chartered Institute of Management Accountants. "Cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it".

How is cost driver calculated?

Find the total cost for the activity in your given information. For instance, you would use the total cost to produce all of the widgets. Divide the activity cost by the volume to find the cost driver rate. For example, if you made 100 widgets for a cost of $3,000: $3,000/100 = $30 per widget.

37 Related Question Answers Found

What is a cost driver give one example?

A cost driver is a variable, such as the level of activity or volume, that causally affects total costs over a given time pan contributes the most to the cost, causes the cost! For example, the number of vehicles assembles is a driver of the costs of steering wheels on a motor-vehicle assembly line.

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.

What are activity drivers?

An activity driver is something that influences the cost of an operation. Activity drivers are used to allocate the costs in secondary cost pools to primary cost pools, as well as to allocate the costs in primary cost pools to cost objects.

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.

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 is sunk cost?

A sunk cost is a cost that an entity has incurred, and which it can no longer recover. Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since these costs cannot be recovered.

What is the High Low method?

The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations.

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.

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 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 is period cost?

A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. A period cost is more closely associated with the passage of time than with a transactional event. Examples of period costs are: Selling expenses. Advertising expenses.

What are the techniques of cost control?

Cost Control Techniques
  • 1 - Planning the Project Budget. You would need to ideally make a budget at the beginning of the planning session with regard to the project at hand.
  • 2 - Keeping a Track of Costs.
  • 3 - Effective Time Management.
  • 4 - Project Change Control.
  • 5 - Use of Earned Value.

What is Job Order Costing with examples?

Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc. Examples of service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc.

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 concept of economies of scale?


In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale.

What do you mean by cost accounting?

Cost accounting definition. April 06, 2018. Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a company's activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage.

How do you calculate ABC method?

Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. Multiply the cost driver rate by the number of cost drivers.