Question

Think about an Information Technology organization and the costing system utilized. What are some examples of cost drivers? How do these cost drivers assist in allocating costs?

Answer 1

Information Technology organization and the costing system utilized

• A lack of accurate information on costs for information and communications technologies hampers effective decision making on ICT proposals.
• Having accurate cost information leads to improved allocation of institutional resources.
• Obtaining relevant costing data requires identifying the main cost drivers of ICT activities, determining system component costs, and using an appropriate methodology to ascertain the total cost of any ICT initiative.
• The costing model used by Athabasca University aims to provide the total costs of any system configuration, allowing more accurate estimates of resource requirements and returns on investment.

Examples of cost drivers

A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. 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

• Number of product returns from customers

If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver should be used.

Cost drivers assist in allocating costs

An activity's costs can be allocated to a particular production lot, and this makes activity-based costing an accurate way of allocating both direct and indirect costs. ... The cost of each activity is apportioned to specific products or lines of production, based on resources consumed by cost drivers.