Cost Drivers Examples In Service Industry

By on July 23, 2013 in See Also: Cost Driver Definition In, the cost driver definition is a factor that incurs cost. Use cost drivers to allocate and to activities or output. Include both indirect and direct to compute the full cost of. Because indirect, such as variable, are not directly traceable to activities, allocate them according to a driver rate to apply these to activities. Based on the activity of the cost driver, the cost driver rate is the rate indirect applied to production activities.

Service Organization Example of ABC. Imagine you are the chief financial officer of Five Star Bank. You are interested in implementing an activity-based costing system to evaluate the cost of different loan products, such as auto loans and home equity loans, offered by the bank. It is likely to continue to become more prevalent in the service industry in the future. Activity-based costing: Theory and practice. In Handbook of Cost Management, edited by B. Brinker, B1-1-B1-33. New York: Warren, Gorham, and Lamont. Activity-based costing for hospitals.

Download the free Know Your Economics guide to easily manage the factors incurring costs in your company. Choosing Cost Drivers An indirect or may have several possible drivers.

Traditional methods allocate indirect to production activities based on of output. Conversely, allocates indirect to particular production activities related to that cost. When deciding which driver to use in terms of allocating indirect cost, consider the cause-and-effect relation between the and the. In addition, consider whether or not the cost activity is easily measurable. It is also necessary to consider the cost behavior of the relevant cost.

The relevant cost refers to the cost’s response to the activity of the. In addition, approximate the between and cost using. Use these at differing hierarchical levels. For example, an indirect or may be relevant at the unit level, the batch level, the level, the level, or the facility level.

Once you determine the appropriate hierarchical level, choose a driver activity at that level in order to allocate the indirect or variable. Cost Driver Rates A driver rate is the amount of indirect or assigned to each unit of cost driver activity. For example, you may apply indirect to hours as $50 dollars per hour. In this case, for each hour of direct required for production, the would then allocate $50 of indirect to the production activities or output. Cost Driver Examples For illustrative purposes, below are some cost driver examples of indirect or variable as well as relevant driver bases for these. Cost Cost Driver Maintenance Machine hours Fuel costsMiles traveled Electricity expenseHours of factory handling Tons of handled If you want to check if your unit economics are sound, then download your free guide.