For example in manufacturing the set up costs are not driven directly by the units of output since each batch can vary in volume. In traditional costing the cost driver to allocate indirect. Your browser does not currently recognize any of the video formats available. Explain the conceptual distinction between activities, drivers and activity. Remember, using only volume based cost drivers to assign non volume related overhead costs can result in the reporting of distorted product costs. What are examples of structural cost drivers answers. Volume based drivers are cost drivers which relates to the things like no. There are no industry standards stipulating or mandating. It can also be used in activitybased costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. Management selects cost drivers as the basis for manufacturing overhead allocation. Some overhead costs are closely related to volume while others are not. Since these nonmanufacturing costs may differ substantially from product to product.
The concept is most commonly used to assign overhead costs to the number of. Cost driver know the significance of cost drivers in cost accounting. In a bank, non volume based costs can include human resource management driven by staff numbers, cleaning driven by floor space or room numbers, and it. In the course of accumulating costs, this system takes into consideration not only volume related but also non volume related activities i. The concept is most commonly used to assign overhead costs to the number of produced units.
We will define the term, look at examples, and learn the steps a company might take when analyzing a cost driver. Distinguish between volume based and nonvolume based cost. In such a scenario, the units of electricity consumed. It refines a costing system by focusing on individual activities as the fundamental cost objectives.
Identify indirect activity pools, cost drivers, unit costs. An activity cost driver, also known as a causal factor, causes the cost of an activity to increase or decrease. As a result, cost drivers are most relevant in the abc costing system. Non volume based cost drivers are cost drivers that are not directly related to the number of units produced. Cost driver know the significance of cost drivers in. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. Traditional product costing systems recognise a range of nonvolumebased cost drivers 2. A cost driver is the direct cause of a cost, and its effect is on the total cost incurred. An example is a change in the cost of warehousing or a change in the level of. Cost bases or drivers often used include labor hours, machine hours and labor costs. Fixed costs do not change with increasesdecreases in units of production volume. Activitybased costing abc is an accounting method that identifies the activities that a firm performs and then assigns indirect costs to products.
A cost driver triggers a change in the cost of an activity. Product diversity difference in product size, product complexity, size of batches and setup times cause product diversity. Generally, the cost driver for short term indirect variable costs may be the volume of outputactivity. First, in traditional costing, only production volume related measures are used to. A cost driver is the unit of an activity that causes the change in activitys cost. Product cost distortion occurs when both of these conditions occur. Chapter 08 testbank solution manual management accounting.
The entity uses volume based cost drivers that depend on the number of units manufactured. Most cost drivers are related to either the volume of production or to the. Non volume based cost drivers are cost drivers that are. Thus, if the costs are inaccurate, the profit forecasts will not be accurate, and the. The cost drivers thus are the link between the activities and the cost.