Question

Question 2

Explain why it is important for a cost accountant to identify properly the cost drivers for the purpose of cost estimation.[8 marks]

Answer 1

Managers use cost drivers primarily to predict costs more accurately. Cost estimations are essential to measure the relationship between costs and the level of activity. This thereby assists in setting standard costs and setting internal benchmarks for the costs. This helps in allocation of overheads in a more accurate manner since if the drivers are not identified properly then it is difficult to identify the bottlenecks in the manufacturing process. These assist in total quality management, better utilization of capacity and also labor productivity. Identifying cost drivers enables the management to make better decisions and allocation of resources. The managers can make more informed planning and control decisions. Cost drivers are crucial in pricing decisions since if the costs are not allocated in an appropriate manner then the firm may lose out to competition in over or under pricing.