A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. Examples of cost drivers are as follows:
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Direct labor hours worked
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Number of customer contacts
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Number of engineering change orders issued
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Number of machine hours used
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Number of product returns from customers
If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver should be used.
A wide variety of factors can cause overhead to increase. To gain a better understanding of these factors, managerial accountants use activity-based costing. The assumption that the more direct labor your employees work, the more overhead your company incurs made sense in the days before automation, but today completely automated factories operate with little or. Direct material cost $3,000 $1,600 Direct labor costs $400 $1,500 Required: a) Compute the manufacturing overhead allocation rate for each department. B) Compute the total cost of Job #897. C) Provide possible reasons why Count-Me-In Inc. Manufacturing uses two different allocated rates.
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