Question

What is the difference between volume-based cost drivers and activity-based cost drivers? Give an example of each to illustrate.
Could you please explain the answer in detail? I know that this question is on Chegg already, but I still need a more in-depth help.

Thanks!

Answer 1

Volume based Cost Drivers and Activity based Cost Drivers:

Volume based cost driver is used in allocating overhead cost in traditional costing system. It is also known as the Traditional costing system where the volume of direct labour or the direct machine hour is used to determine a plant wide overhead rate and based on that rate overhead is allocated toe different products multiplying by the volume of labour or machine hour consumed by the respective product.

Activity based costing system is a more scientific and rational costing technique where different activity is considered for allocating overhead cost related to that activity to the various products.

Volume based cost driver considers a single activity to allocate the overhead cost. There are various costs included in the overhead cost such as indirect labour, indirect materials, and other indirect expenses. It may so happen for a company that some product line consumes high indirect materials or some product consumes high indirect labour. If only one base is considered to allocate the total overhead cost then there is a definite chance of error in allocating the overhead cost. So, to allocate the total overhead cost accurately and scientifically we need to use more than one activity as the base and it weighteg for each base for each product line is to be considered and therefrom we get the concept o Activity Based Costing system. So, Activity based costing is a more updated, modern and scientific system which eliminates the limitations of traditional or volume based costing system and it helps to ascertain the cost more accurately.

From the above discussion I hope you got the core of these two system.

Thank You..!!