Question

Assume activity-based costing is suitable for your business. Select TWO possible activity cost drivers in your business and describe in detail what the activities in the cost driver are.

Answer 1

Activity based costing is the costing technique in which cost are allocated between different products or departments on the basis of activities involved in it.

Cost driver is a method of computing costs associated with each product in a company based on the amount of resources consumed by each activity.

Two possible cost drivers in business are Total direct labor hours and number of orders. For example, Say we have total ordering cost of $10000 and we need to allocate ordering cost between 3 products say A,B,C and D. Now we need to determine the cost driver on the basis of which ordering cost will be allocated between 4 products. For ordering cost, cost driver will be number of orders of every products. Now on the basis of number of orders, ordering cost of $10000 will be allocated between 4 products.

Another cost driver is direct labor hours. Say company is produced 4 products A,B,C and D. Total direct labor cost is $100000 and we need to divide direct labor cost between 4 products. Here cost driver for allocating direct labor cost will be direct labor hours. Here we need to allocate direct labor cost of $100000 between 4 products on the basis of number of direct labor hours taken by each product.