CA Intermediate · Cost and Management Accounting · Activity Based Costing
In activity based costing, which of the following best describes a 'cost driver'?
A cost driver is the factor that causes the cost of an activity to be incurred, for example number of set-ups, purchase orders or inspections. It is used to trace activity costs to products, unlike a cost pool, which is only the accumulated cost.
- AA factor that causes the cost of an activity to be incurredCorrect
- BA department to which overheads are first allocated
- CThe total overhead of a cost pool
- DA method of apportioning costs equally to all products
Explanation
A cost driver is the factor that causes or influences the cost of an activity, such as number of set-ups or purchase orders. A department is a cost centre in traditional costing, and a cost pool is a collection of costs, not the driver itself.
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