The Cost Driver Approach Allocates A Cost To Production Accounting Essay

The cost-driver attack allocates a cost to production, based on the actions or factors that cause it. For illustration, the killing costs of a printing imperativeness might be allocated based on the figure of colourss used. As illustrated in the sidebar on TRADITIONAL vs. COST-DRIVER APPROACHES this consequences in more accurate costing.

The exhibit on Basic work stages and cost drivers shows typical cost drivers for the assorted phases of work ( planning, acquiring ready to work, working, completing and inspecting work ) . Analyzing the 2nd phase — acquiring ready to work — we find activities that contribute costs to this phase include telling natural stuffs and puting up machines. After roll uping applicable costs in pools, cost drivers are used to apportion these cost pools to production. Potential cost drivers for this 2nd phase include the figure of production tallies or machine set-ups. If it is determined the figure of production tallies is the most appropriate cost driver, this pool is allocated to production in proportion to the figure of production tallies necessary to do the merchandise.

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Beyond better merchandise costing and control, the touchable benefits of placing cost drivers include:

Extinguishing and cut downing cost. After placing cost drivers, the natural following measure — to see if some of these costs can be eliminated or reduced — is greatly facilitated.

Foregrounding cost of complexness. Keeping an luxuriant merchandise line is dearly-won, peculiarly when it consequences in short and legion production tallies. Normally these costs are non separated and therefore are concealed. In the hunt for cost drivers, they will be disclosed and associated with single merchandises. Though marketing scheme may go on to name for holding an luxuriant merchandise line, the costs will be more evident.

Re analyzing long-run costs. American direction and accounting pattern frequently are criticized for concentrating on the short tally. The cost-driver attack, with its focal point on cost causes and behaviour, leads one to analyze non merely short-run variable production costs but besides long-run costs that were considered committed or fixed. Indeed, many costs frequently considered fixed frequently do vary, nevertheless bit by bit, over the long term and are hence capable to better control.

Developing direction consciousness. Directors can be encouraged to develop consciousness of the causes of costs. Their fillips, publicities and public presentation ratings can be based on the application of cost-driver public presentation.

In implementing an activity-based costing ( ABC ) system the choice of cost drivers is a major issue since truth must be traded off against the complexness of the ABC-system. On the one manus, a high truth in apportioning overhead costs frequently requires a high figure of cost drivers. On the other manus, a little figure of cost drivers is desirable to accomplish acceptable information cost and to do the ABC-system easier for direction to understand. In this paper a mathematical theoretical account to back up optimum cost driver choice is developed. While bing attacks consider merely the possible replacing of one cost driver by merely one other cost driver, the theoretical account takes into history that cost drivers can besides be replaced by combinations of cost drivers. This attack yields a more accurate cost allotment with the same ABC-system complexness. ( 2001 Academic Press )

Though a state of affairs is considered in which ABC is able to supply precise ( fringy )

costs, our theoretical account might besides be helpful when this is no longer the instance. For illustration,

when diseconomies of graduated table are present, proportionality between activity cost and

cost driver volume is violated and ABC tends to undervalue fringy costs.

However, one could seek to counterbalance this consequence by increasing the activity costs

of some of the available cost drivers ( Christensen and Demski, 1997 ) . Then the

most accurate ABC-system would utilize all available cost drivers to apportion these

consistently adjusted activity costs and the truth step ( 6 ) would merely

step the distance from this modii¬?ed benchmark system.

Harmonizing to experts, the underlying standards for choosing cost drivers are

optional though they are still really of import. They are:

1. Easy designation, usage and apprehension. To easy place a cost

driver we must look into its relationship with indirect costs. After placing

all work activities ( typically in an “ activity dictionary ” ) , a cost assignment

theoretical account is constructed that contains complete information about the beginning of

resource disbursals and their cost allotment methods. 10 Gary Cokins, Sorinel CA?puAYneanu

2. The being of a direct relationship between indirect costs and cost

drivers. Get downing from the right designation of cost drivers that highlight the

causal connexions between indirect costs and cost drivers, this so allows for

obtaining accurate and true existent costs of cost objects ( e.g. , activities, merchandises,

clients ) .

3. Positive or negative influence on staff. Explaining the construct of a cost

driver to directors and employees creates the advantages for better

apprehension of the behaviour of costs and what influences alterations in them.

This leads to an interior harmoniousness within the endeavor between employees and

direction, thereby increasing concern public presentations by supplying visibleness

as to what factors drive the ingestion of costs. For commercial companies it

accurately reports beds of net income borders for analysis and actions.

Harmonizing to experts, the standards for finding and choosing cost

drivers are peculiarly of import.

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