CA Intermediate · Cost and Management Accounting · Activity Based Costing
In Activity Based Costing, which of the following is the most appropriate cost driver for the cost pool 'material handling' when the cost is incurred mainly because materials are moved between stores and production floors?
The number of material movements or requisitions handled is the right cost driver, because material handling cost is caused by how often materials are moved. Volume-based measures such as labour hours, machine hours or units produced do not reflect that causal relationship and would misallocate cost.
- ANumber of material movements (requisitions handled)Correct
- BDirect labour hours
- CMachine hours
- DUnits produced
Explanation
A cost driver should reflect the cause of the activity cost. Material handling cost varies with the number of movements or requisitions handled, not with labour hours, machine hours or output volume. Volume-based bases would distort cost to high-volume products.
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