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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Which of the following best describes a cost driver in activity based costing?

A cost driver is the factor that causes the cost of an activity to be incurred, for example the number of machine set-ups or purchase orders. It is used to assign the activity's cost pool to products. A cost pool is the collection of costs, not the driver.

  1. AA factor that causes the cost of an activity to be incurredCorrect
  2. BA group of overhead costs that are absorbed using the same rate
  3. CThe total overhead cost of a production department
  4. DA fixed cost that cannot be traced to any product

Explanation

A cost driver is the factor that causes the cost of an activity to change or be incurred, such as the number of set-ups or purchase orders. A group of costs absorbed together is a cost pool, which is why the second option is wrong. Departmental totals and untraceable fixed costs are not cost drivers.

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