The following costs are budgeted for the first quarters operations.Plus, get practice tests, quizzes, and personalized coaching to help you.
We will define the term, look at examples, and learn the steps a company might take when analyzing a cost driver. At your place of business, you sell various electronics ranging from computers to televisions to car stereos. However, after about three months in business, you realize that the costs that you incurred are significantly higher than anticipated. These costs have begun to cut into your profits, and its time to figure out whats happening. You soon realize that a particular brand of car stereos have had an abundance of returns, because the volume button does not work well. It was at that time that you also realized that those returns have become a cost driver. Examples Of Cost In Globalization Driver So YouDefinition of Cost Driver So you may be wondering, what is meant by the term cost driver Well, a cost driver is a unit of activity that causes a business to endure costs. So, your business was incurring costs via returns by customers. Therefore, the cost driver for your business was products returned by customers. Examples Of Cost In Globalization Drivers That AffectExamples of Cost Drivers Lets take a minute to look at some common costs drivers that affect businesses. If a company has to pay employees or companies to handle products, like getting them ready to ship, there are also costs. Obviously, the more components in a product, the higher the costs. From our example earlier, stereos have a lot of components, which means they cost more money to produce than, say, a rubber ball. The amount of hours that a machine runs to make those products is often a cost driver for companies. So how does a business do this The following steps show the process a business might take in order to analyze cost drivers. For example, does a company incur higher costs when using packing peanuts versus bubble wrap Is there a cheaper alternative to packing items. If, for instance, a company finds out that packing items creates a higher cost than expected, it then needs to determine what is causing that high packing cost. Maybe packing peanuts costs double the price of bubble wrap and is, therefore, the cost driver. The products are produced in its Fabrication and Assembly production departments. The company uses activity based costing to compute unit product cost. Data relating to the companys three activity centers are given. B. Direct labor hours. C. The quantity of direct materials used. D.Square foota.
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