Menu Corporate Finance Institute My Dashboard Get Started All Courses Certification Programs Financial Modeling Valuation (FMVA) Certified Banking Credit Analyst (CBCA) Capital Markets Securities Analyst (CMSA) Compare Certifications Course Bundles Machine Learning Python See All Courses Pricing For Business Overview Our Solution My Account My Courses My Resources My Profile Account Settings Sign Out My Dashboard Log In Get Started My Dashboard My Account My Courses My Resources My Profile Account Settings Sign Out All Courses Certification Programs Financial Modeling Valuation (FMVA) Certified Banking Credit Analyst (CBCA) Capital Markets Securities Analyst (CMSA) Compare Certifications Course Bundles Machine Learning Python See All Courses Pricing For Business Overview Our Solution Log In Get Started Activity Cost Driver An action that causes variable costs to increase or decrease for a business Home Resources Knowledge Accounting Activity Cost Driver What is an Activity Cost Driver An activity cost driver refers to actions that cause variable costs Variable Costs Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces.In other words, they are costs that vary to increase or decrease for a business.
Activity Cost For Production Scheduling Drivers Include ThingsActivity cost drivers include things such as labor hours, machine hours, and customer contacts.They are used in activity-based costing (ABC) a segment of managerial accounting.
Activity Cost For Production Scheduling Driver Refers ToSummary Activity cost drivers are actions that cause costs to increase or decrease. Allocating cost drivers appropriately is important in accurately determining the cost of producing a good or service, as well as making financial projections. How Activity Cost Drivers Work Activity cost drivers are specific activities that cause variable expenses to be incurred. One variable expense can comprise more than a single activity cost driver. For example, machine hours and labor hours can be activity cost drivers in the manufacturing of a product. All variable expenses can be broken down and looked at by one or several activity cost drivers, which can also be influenced by several factors. For example, if the minimum wage National Average Wage Index (NAWI) The National Average Wage Index (NAWI) is a benchmark used as a metric of inflation tracking wage growth among American workers. The Social Security increases, it can cause the cost of producing a product to also increase. Examples of Activity Cost Drivers Direct labor hours Machine setups required Number of customer contacts Number of customer change orders What is Activity-Based Costing (ABC) Activity-based costing (ABC) is a costing method where indirect costs are assigned to products and services Products and Services A product is a tangible item that is put on the market for acquisition, attention, or consumption while a service is an intangible item, which arises from. It is done by looking at which products demand particular costs. For example, under ABC, a manufacturing company may decide to allocate rent expense to each product based on the amount of space the machines that are utilized to produce that particular product uses. Improperly allocating the costs can result in poor decision-making. Imagine that the previously mentioned manufacturing plant produced two items with the exact same price and sales volume. The direct costs for Item A and Item B are 1,000 per month and 500 per month, respectively. However, Item A used up 10 of the manufacturing space, while item B used up 90. If rent is 1,000 per month, the total rent allocated to item B would be 900 (and 100 to item A). Therefore, the total cost to produce item A is 1,100, and the total cost to produce item B is 1,400. While the above is a heavily-simplified example compared to a real-world situation, it shows the importance of allocating indirect costs to get a more accurate financial picture of a company.
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