3.2 Cost Drivers
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Myo Naing3.2 Cost Drivers
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Myo NaingFor Exams from September 2024 to June 2025 – (PM) Performance Management
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3.2 Cost Drivers
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Cost driver – a factor which can cause a change in the cost of
an activity.
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In absorption costing, it is assumed that the volume of output is the
Category
factor which determines costs. However, ABC recognises that the
amount of cost may be determined by factors other than the output 2.3 Activity-Based Costing
volume. These factors are called cost drivers.
For example, the number of purchase orders processed could be
the cost driver for a procurement department.
An activity could give rise to multiple cost drivers as it consumes
different types of overheads. For example, cost drivers associated
with a production activity may be:
Machine operator(s) hours for apportionment of human resource
costs;
Floor space occupied for apportionment of the cost of premises;
Power consumed as direct overheads; and
Quantity of waste and rejected output for apportionment of
recycling and quality costs.
Therefore, different overhead cost types are absorbed into
production units using more appropriate rates based on cost drivers
rather than a single absorption rate. For example, for a particular
production department, the following rates may be suitable:
A warehousing cost/kg of material used;
Electricity cost/machine hour;
Production scheduling cost/production order, etc.
These can then be applied and aggregated to calculate an
overhead cost per unit, as in Step 5 of the following section.
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