Wednesday 19 December 2018

How to Determine Cost Drivers?

A cost drivers are the unit of an activity that causes the change in activity's cost. cost drivers is any factor which causes a change in the cost of an activity. To is the direct cause of a cost and its effect is on the total cost incur.

In the process of designing a system of cost base on activity (Activity Based Costing System/ABC). Require an understanding with regard to the number of determine fee require and determine the appropriate cost of determines.

Cost Drivers
Both of these factors are closely related because this type of cost driver select will affect. The number of determines that are require according the level of accuracy of the system. The problem arises when the number of determine charges use too much. Because it is not economically profitable to specify different determine from each activity and on some companies that use process activity together (Aggregate) and determines

The search cost as the basis of a single activity to the product produce. There are difficulties to select the appropriate determine.

The number of Determines that are require

Minimum amount of determines that are require in the system cost base on activities depends on the consideration of the level of accuracy of the desire product cost report and the complexity of the product mix. The higher the level of accuracy that is consider. The number of determines that are require more and more. There are three factors that affect the number of determine fee require, namely:

Diversity of Product (Product Diversity)

Diversity on the product may occur if the product consuming activity in different proportions. The degree of diversity of products is measure by determining the ratio of consumption of each product and divide the activity ratio of the activity with a high ratio of consumption of low activity to determine the degree of diversity of products that analyze.

The relative Costs of the activity be trace (the relative cost of activities aggregate)

Relative Cost from activity States the percentage of the cost of the activity against the total cost of the production process. In the production process with activities that are aggregate, relative cost from activity is very influential, because the higher the relative cost of the activity will generate a high distortion if the consumption of the product does not search accurate due to the use of inappropriate activity determines (determine amount and type of activity).

The level of diversity production volume (Volume of Diversity)

Diversity in volume production occurs when the product is manufacture in sizes of product group (batch) are different.

Different batch sizes will affect the activity of production and other support activities, such as the number of booking and delivery process (Shipping). By implementing a system of cost base on activity, determine adjustments can be complete cost use due to the influence of the different production volume. Where traditional cost system this cannot be complete.

Product diversity and diversity production volumes each have an impact on the distortions that occur on the accuracy of the cost of the resulting product. The resulting irrelevancy due to difference in production volume (Volume of Diversity) would reinforce distortions of product diversity, if high-intensity product produce in the size of the production (batch) of less than low-intensity product. These conditions will produce less-double calculation on high-intensity, low-volume product, and more-double calculation in low-intensity, high-volume product.

The influence of both these conflicting sources of distortion in high-intensity product produce in a larger batch sizes from low-intensity product, so when the effects of the distortion exceeds the volume of diversity This may cause volume diversity condition that occurs is the high-intensity, high-volume product will be more-calculation while low-intensity.

Low-volume product happens less-calculation.

Conditions would otherwise occur if the influence of product diversity is more dominant. If the degree of diversity of production volume is equal to the degree of diversity of products, report of the resulting produce costs more accurately.

The interaction of these three factors.

That influence the selection of the determine charge specifically the higher relative costs of activity be trace (not related to the volume of production), the distortion your search generate from cost base on production units will grow. While the product diversity and volume of diversity can be mutually reinforcing and against the distortions that occur.

Select the appropriate Fee Determines

After determining the minimum amount of cost drivers are require. The next step is selecting cost drivers that match the design of the system costs event base confirms that, there are three factors that affect the selection of the appropriate cost of determines, which are:

Ease to determine the necessary data from the determine costs (cost of measurement)

In the system of cost base on activity a good degree of accuracy obtain by using more cost drivers rather. Than a single determine base on the volume of production. To reduce the cost of measurement from determine activity. (cost of measurement), activity base cost system utilizing an easily definable determine quantity.

The selection of the cost using determines the transaction amount of activity. (number of transactions generate by activity) as a replacement for determine costs. Base on the duration of the activity, can reduce the cost of measurement in designing system cost base on activity.

Specify the data of the determine base on the number of transactions is easily obtain. Since transactions are generate at the time an activity is perform. Determine base on such transactions, among others. The number of orders process, the amount of the delivery process, and the number of inspections conduct.

The correlation between the level of consumption of the determine activity costs with actual consumption activity (Degree of Correlation)

The use of a determine that reveals the cost of indirect consumption activity by the product will result in distortion occurs in the product cost report. Because these determines cannot describe accurately. The actual activity levels of consumption of the product.

How obvious determine for the cost of the actual activity of consumption reveal product. It can be measure by the level of correlation between. The quantity of activity was trace to the product against. The actual consumption activity by product. The correlation relationship use to know the accuracy of your searches by product and activity fees as a tool in selecting a determine fees accordingly.

The determine behavior Influence the cost of the environment (Behavioral Effect)

In the select determine costs, effects of use of determines certain cost against. The cost of individual behavior within the company must be consider. The effect of behavior can be beneficial (beneficial) or hazardous (harmful). The useful behavior in behavior due to use of certain desire fee determines. While his influence is dangerous if the determine does not use the result desire.

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