Question

Selecting the appropriate cost driver is the key to effective activity based costing. Identify three overhead elements in a simple product your current or former employer makes, and identify what you think the best cost driver would be for each element. 100 words or more.

NB/ My place of work is a food processing company

Answer 1

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, power consumed, purchase orders, quality inspections or production orders.

There are two categories of activity measures: transaction drivers, which involves counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count such as machine hours and/or direct labor hours to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are to a certain extent unrelated to how many units are produced. These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity and product-level activity.

Based on the above levels of categories,few are described as below,

batch level activity:  

Based on the level of batch of units produced by each activity either a machines for instance activity costs of machines are allocated based on level of batches produced.

Machine setups:

machine setups are allocated to the units produced .i.e., cost of units are based on number of machine setups/productions performed.

kilometres:

travelling costs are allocated based on number of kilometres travelled for such units specifically .