With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. Generally, the cost driver for short term indirect variable costs may be the volume of outputactivity but for long term indirect variable costs, the cost drivers will not be related to volume of outputactivity.
The cost drivers thus are the link between the activities and the cost. and then uses volume-based cost drivers to allocate factory overhead costs to individual products or services.Īctivity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product. Examples Of Executional Cost Driver Is Measure.The basic transformation processes internally and not just the final assembly.Operating departments should reduce their departmental overhead first by integrating their overhead activities with those of the GA overhead departments.Generally the cost driver for short term indirect variable costs may be the volume of outputactivity but for long term indirect variable costs the cost drivers will not be related to volume of outputactivity.Traditional costing methods allocate indirect costs to production activities based on volume of output.In the production of forks the stamping of each fork into the prescribed shape is an example of a unit-level cost driver.Is one unionized and the other not Or if comparing suppliers across countries are wage rates driving the differences If material costs are significantly lower it probably means that the supplier is more vertically integrated buying raw materials and performing the basic transformation processes in-house rather than simply doing final assembly. If material costs are significantly lower it probably means that the supplier is vertically integrated buys raw materials and is powerful. If one is unionized and the other is not or when comparing suppliers across countries they pay prices that drive the differences are. In making forks stamping each fork in the prescribed form is an example of a unit charge driver. Traditional costing methods have indirect costs to production activities based on production volume. However for long-term indirect variable costs drivers cost not related to the amount of expenses. As a rule the cost driver for short-term indirect variable costs can be the volume of payout capacity. Operations departments should first reduce their department management by integrating their overhead activities with those of the GA overhead departments.
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