Question

Identifying Cost Drivers in an ABC system

Patterson makes electronic components for handheld games and has identified several activities as components of manufacturing overhead: factory rent, factory utilities, quality inspections, materials handling, machine setup, employee training, machine maintenance, inventory security costs, and supervisor salaries. For each activity that Patterson has identified, choose a cost driver to allocate that cost. Explain your reasoning.

Answer 1

Factory Rent : No of days worked

Factory Utilities: Units of utility consumed

Quality Inspection : Hours of inspection on production run

Material Handling : No of orders received

Machine Setup : Machine hours

Employee Training : Hours worked

Machine Maintenance : Machine hours used

Inventory Security Costs : Finished goods units

Supervisor Salary : No of workers

Step-by-step explanation:

A cost driver is unit of activity on which cost is allocated. Cost driver is considered as a direct cause of the cost. In ABC costing cost are allocated to the goods based on the cost drivers.