Activity Based Costing Drivers Examples
In my previous post An introduction to Activity Based Costing I discussed the. A worked example for Activity Based Costing. Based on the activity drivers from. Activity Based Costing. ‘Actions, based on activity driver analysis. For example, the wood and paint that it takes to make a chair. A cost driver is the unit of an activity that causes the. Activity Based Costing is based on the. Some examples of indirect costs and their drivers. Know how companies identify and use cost drivers in activity-based costing. Chapter 4-15 Example of ABC Versus Traditional Costing.
Product Costing Manufacturing companies create products to be sold to customers. In order to make a profit on their products, these companies must accurately determine how much it costs to manufacture each product. Companies do this through product costing. Product costing is the process of determining the business expenses associated with the manufacture of a product.
Associated expenses include direct labor and materials and manufacturing overhead. Labor and materials costs are considered direct costs if they are incurred during the manufacture of a product and can be directly allocated to that product. Manufacturing overhead includes all other expenses incurred during the manufacture of a product that cannot be directly allocated to that product.
This might include factory rent, payroll taxes on direct labor wages, and machine maintenance. These costs are also known as indirect costs. Manufacturing overhead must be accurately allocated to a product's cost for manufacturing companies to set product sales prices and determine if products are producing profits. Traditional vs. Activity-Based Costing Traditional costing systems allocate manufacturing overhead by dividing total indirect costs by a cost driver to obtain one rate to be used to allocate overhead to different products.
A cost driver is an activity that controls the amount of costs incurred. For example, in a factory, the number of hours a machine runs determines how much electricity is used and how much will have to be spent on maintenance. In this example, the number of machine hours is the cost driver that controls how much electricity is used and the cost of maintenance.
Manadhai Mayakkam Super Hit Melody Song Free Download here. The fewer the number of machine hours, the less the cost of electricity and maintenance; whereas, the higher the number of machine hours, the more the cost of electricity and maintenance. The number of machine hours is a typical cost driver used in traditional costing systems, as is direct labor hours.
Traditional costing systems are simple, but can result in over-costing or under-costing, as the manufacture of products is generally complex and influenced by more than one cost driver. Activity-based costing systems allocate manufacturing overhead by assigning indirect costs to several different cost pools and dividing each cost pool by its associated cost driver to obtain several different rates that can then be used to allocate overhead to different products. A cost pool is a group of individual costs. Activity-based costing systems allow manufacturing companies to more accurately allocate overhead expenses to specific products, as multiple cost drivers are used. Like traditional costing systems, machine hours and direct labor hours are typical cost drivers used. Other examples include square footage used per product to allocate factory rent and maintenance and number of purchase orders to allocate purchasing department expenses. Formula An activity-based costing rate is calculated by assigning indirect costs to a cost pool, adding the costs included in that cost pool together, then dividing the cost pool total by the cost driver.
Cost pool total ÷ Cost driver The result will be a dollar amount that can then be multiplied by the number of products manufactured to obtain a total product cost for that cost pool. By calculating the activity-based costing rate for multiple cost pools, a manufacturing company can more accurately determine product cost. Examples Now let's look at a couple of examples.