Activity Cost Driver
Definition of 'Activity Cost Driver'
The first step in using activity-based costing (ABC) is to identify the activities that are performed in the organization. Once the activities have been identified, the next step is to identify the cost drivers for each activity. The cost driver for an activity is the factor that causes or drives the cost of the activity.
For example, the cost driver for the activity of machining a part might be the number of parts machined. The cost driver for the activity of assembling a product might be the number of units assembled.
Once the cost drivers have been identified, the next step is to assign costs to the cost objects. This is done by multiplying the cost driver rate for each activity by the actual usage of the cost driver for each cost object.
For example, if the cost driver rate for the machining activity is $1 per part and 100 parts are machined, then the cost of machining the parts would be $100. If the cost driver rate for the assembly activity is $2 per unit and 100 units are assembled, then the cost of assembling the units would be $200.
The total cost of a cost object is the sum of the costs assigned to the cost object from all of the activities that are performed on the cost object.
Activity-based costing is a more accurate way to assign costs to cost objects than traditional costing methods because it takes into account the different activities that are performed in the organization and the different cost drivers for each activity. This results in a more accurate allocation of costs to cost objects and a more accurate understanding of the costs of products and services.
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