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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Which of the following best describes a cost driver in an activity based costing (ABC) system?

A cost driver is the factor that causes the cost of an activity to change, for example the number of set-ups or orders placed. It is used to assign the activity's cost pool to products, which distinguishes it from the cost pool itself.

  1. AA factor that causes the cost of an activity to changeCorrect
  2. BA group of similar costs that are collected together in one account
  3. CThe total overhead cost of a production department
  4. DThe unit of output on which direct labour is paid

Explanation

A cost driver is the factor that causes the cost of an activity to occur or change, such as the number of machine set-ups or purchase orders. A group of costs collected together describes a cost pool, not a driver. Department totals and labour payment units are not what ABC means by a cost driver.

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