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CA Intermediate · Cost and Management Accounting · Activity Based Costing

In Activity Based Costing, which of the following is the correct description of a 'cost driver'?

A cost driver is the factor that causes a change in the cost of an activity, for example the number of set-ups or inspections. It is the basis used to assign activity cost pool amounts to products, unlike a cost pool, which is only the collection of costs.

  1. AA factor that causes a change in the cost of an activityCorrect
  2. BThe total pool of costs collected for a department
  3. CThe physical output produced by a production line
  4. DA method of apportioning fixed overheads on direct labour hours

Explanation

A cost driver is the factor that causes the cost of an activity to change, such as number of set-ups or number of inspections. The cost pool is the collection of costs, not the driver. Apportioning on direct labour hours is the traditional approach, not ABC.

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