CA Intermediate · Cost and Management Accounting · Activity Based Costing
In Activity Based Costing, which of the following is a cost driver most appropriate for the activity 'Quality inspection of finished batches'?
The number of inspections carried out is the correct cost driver, because inspection cost is caused by how many inspections are performed. Direct labour hours, machine hours and material value do not drive inspection effort, so they would distort the cost traced to products.
- ANumber of inspections carried outCorrect
- BDirect labour hours worked
- CMachine hours used
- DValue of raw materials consumed
Explanation
A cost driver should have a cause-and-effect link with the cost of the activity. Inspection cost varies with the number of inspections performed. Labour hours, machine hours and material value have no direct causal relation with inspection effort.
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