Currently set to Index
Currently set to Follow

Activity Drivers

Category: Blog, Finances and accountancy

Identification of activity drivers required for the implementation of activity-based costing is not an easy task. It is worth noting a few basic principles, the observance of which will both facilitate the implementation process and provide more reliable results.

What are the activity-based cost drivers?

Activity-based cost carriers are the basis for the settlement of costs accumulated in the cost pools of activities into products (cost objects) benefiting from these activities. It should be emphasized that some activities can be assigned several different cost carriers. However, it is important to choose the most appropriate unit of measurement for the calculation of products.

The quantity considered as a cost carrier of the activity driver should:

  • reflect the demand of a given product in relation to other products for a given activity,
  • indicate the cause of occurrence of costs (or should be correlated with it),
  • be understandable and easy to measure.

When determining activity cost carriers, always ask the question: does one product require more of a given activity than another, and if so, why. In this process, it is important to obtain substantive support from people who are directly involved in the performance of a given activity, because often at the level of a department or a division (outside the “official” information system of the enterprise), there is collected data which can be used to the cost carriers of particular activities.

Examples of activities with the corresponding cost carrier

  • Delivery of materials – number of batches.
  • Changeover of machinery and equipment – the number of varieties.
  • Movement costs – number of machine-hours.
  • Internal transport – the number of pieces.
  • Shipping of products – the number of lots.

The factor, which in the process of determining the activity cost carriers should be very carefully considered, is the question of the cost of collecting information. In spite of the fact that the selected medium will reflect the cause of costs and the demand of a given product in relation to other products for a given activity better than others, it will not be accepted as an appropriate medium of activity costs for the needs of ABC calculation if it is difficult to measure or its measurement is too expensive. The improvement in accuracy of the calculation may not be large enough to justify the additional cost of collecting information about the cost carrier of a particular activity. It happens, that instead of using the “best” carriers, the “slightly worse” ones are used, but they are easier to measure.

It should be remembered that in practice, it is most probably impossible to determine for each identified activity such a carrier that perfectly reflects the relation between the costs of a given activity and the product. Sometimes in order to relate the costs of such an activity to a product, it will be necessary to use an accounting key based on the quantity or production cost, i.e. a division key which is the most serious drawback in traditional cost accounting. Unfortunately, ABC calculation does not eliminate all problems connected with the settlement of indirect costs and not all indirect costs will be able to be referred to products with the application of activity-based costing by means of activity-based cost carriers (reflecting the cause of cost generation and the demand of a given product for a given activity). In the end, however, the percentage of described costs will still be incomparably smaller than in the case of traditional cost accounting systems, and therefore the size of distortions will also be incomparably smaller.

+ posts
You might also like
Also check
Menu