Cost Driver Analysis Example ((install)) | POPULAR · 2024 |

These costs are traced directly using actual resource consumption records (e.g., maintenance logs, payroll records for setup workers, move tickets). We now select drivers that link each activity’s cost to the two product lines.

= $600,000 / 1,200 setups = $500 per setup

| Activity | Activity Cost Driver | Total Driver Quantity (Annual) | |----------|----------------------|-------------------------------| | Machine operation | Machine hours | 50,000 hours | | Setup | Number of setups | 1,200 setups | | Quality inspection | Number of inspections | 2,500 inspections | | Material handling | Number of material moves | 15,000 moves | We compute the rate per unit of activity cost driver.

= $1,000,000 / 50,000 machine hours = $20 per machine hour

= $500,000 / 2,500 inspections = $200 per inspection

| Product | Traditional Overhead | ABC Overhead | Difference | |---------|---------------------|--------------|------------| | Standard chairs | 80,000 × $24 = $1,920,000 | $1,100,000 | Overcosted by $820,000 | | Custom tables | 20,000 × $24 = $480,000 | $1,300,000 | Undercosted by $820,000 |

| Activity | Resource Cost Driver | Total Annual Cost | |----------|----------------------|-------------------| | Machine operation | Machine hours | $1,000,000 | | Setup | Setup hours | $600,000 | | Quality inspection | Inspection hours | $500,000 | | Material handling | Number of material moves | $300,000 | | | | $2,400,000 |

= $300,000 / 15,000 moves = $20 per move Step 5: Trace Costs to Products Using Actual Driver Consumption Now we collect data on how many driver units each product line consumes annually.