Cost Drivers
What is a cost driver?
A factor that causes a change in the cost of an activity.
These drive the costs in activity-based costing and are specific actions like ordering materials, inspecting products, or setting up machines.
activities
What are unit-level costs?
Costs that vary with the number of units produced.
What is a key benefit of using ABC?
More accurate cost allocation and better insight into cost drivers.
How is ABC useful in the manufacturing industry?
It helps in understanding the costs associated with different production activities, such as machining, assembly, and quality control.
Give an example of a cost driver in a manufacturing setting.
Machine hours, labor hours, or number of setups.
Activities in ABC are important because they help assign this type of cost, which is not directly tied to a specific product but supports overall production, like rent or utilities
overhead costs (or indirect costs)
Describe batch-level costs.
Costs associated with a group of units produced or processed together, such as setup costs.
How does ABC help in cost control?
It identifies high-cost activities and areas for improvement, allowing for targeted cost-saving measures
What role does ABC play in the healthcare sector?
ABC provides insights into the costs of various medical services and treatments, aiding in pricing and resource allocation.
How do cost drivers help in Activity-Based Costing?
They help allocate indirect costs more accurately to products or services based on the activities that generate those costs
In activity-based costing, businesses track activities to understand how much each one adds to the total cost of this _____ of a product or service.
cost
What are product-level costs?
Costs related to specific products or product lines, such as product design or marketing costs.
What is a common challenge faced when using ABC?
The method can be time-consuming and costly to implement, especially in large organizations
Explain how ABC can be used in the telecommunications industry.
It helps allocate costs to different services (e.g., internet, TV, phone) based on usage and service delivery activities.
Identify a common cost driver in the healthcare industry
Number of patient visits, number of diagnostic tests, or length of patient stay
This activity happens when machines need to be adjusted or prepared before producing a new batch of products.
machine setup
Give an example of facility-level costs.
Rent, utilities, or general administrative expenses that support the overall production environment.
In which type of industries is ABC particularly beneficial?
Industries with complex production processes and high overhead costs, such as manufacturing, healthcare, and IT services
How can ABC improve cost management in the retail industry?
By analyzing costs related to inventory management, sales promotions, and customer service, leading to better pricing and product mix decisions
How can the number of customer support calls be a cost driver in a telecommunications company
The number of support calls drives the cost of customer service operations, including staffing and resources
This activity ensures that products meet standards by checking for defects or problems before they leave the factory.
quality control (or inspection)
Why is understanding the cost hierarchy important in Activity-Based Costing?
It helps allocate costs more accurately, improving decision-making and cost management by understanding how different costs are incurred
How does ABC improve pricing strategies?
By providing a clearer understanding of the actual costs associated with products and services, enabling more accurate and competitive pricing.
Describe a scenario where a pharmaceutical company might use ABC
ABC can be used to allocate research and development costs, clinical trial expenses, and marketing costs to specific drugs, helping to assess the profitability of each product