Improperly allocating the costs can result in poor decision-making. For example, under ABC, a manufacturing company may decide to allocate rent expense to each product based on the amount of space the machines that are utilized to produce that particular product uses. It is done by looking at which products demand particular costs. Examples of Activity Cost DriversĪctivity-based costing (ABC) is a costing method where indirect costs are assigned to products and services. For example, if the minimum wage increases, it can cause the cost of producing a product to also increase. For example, machine hours and labor hours can be activity cost drivers in the manufacturing of a product.Īll variable expenses can be broken down and looked at by one or several activity cost drivers, which can also be influenced by several factors. One variable expense can comprise more than a single activity cost driver. Allocating cost drivers appropriately is important in accurately determining the cost of producing a good or service, as well as making financial projections.Īctivity cost drivers are specific activities that cause variable expenses to be incurred.Activity cost drivers are used in activity-based accounting (ABC).Activity cost drivers are actions that cause costs to increase or decrease.
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