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CMA Final · Strategic Cost Management · Activity Based Cost Management

In an activity based costing system, which of the following is the cost driver most appropriately matched to the 'machine set-up' activity in a plant making products in small batches?

The number of set-ups is the right cost driver for machine set-up activity, because set-up costs arise each time a batch changes over and not with units, labour hours or machine hours, which are volume-related measures.

  1. ANumber of set-ups performedCorrect
  2. BDirect labour hours
  3. CUnits produced
  4. DMachine hours

Explanation

Set-up cost is incurred each time a batch is changed over, so it varies with the number of set-ups rather than with volume. Direct labour hours, units or machine hours are volume-based and would distort product costs for small-batch products.

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