The three coats are applied in a sealed room using a spraying process followed by an ultraviolet drying process. The painting process involves a white base coat, a color coat, and a clear protective top coat. For example, a furniture manufacturer produces and sells wooden tables in various colors. A company can differentiate among costs that drive overhead and have value, those that do not drive overhead but still add value, and those that may or may not drive the overhead but do not add any value.
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How accurate, then, is the company’s product cost information if it has become more efficient in its production process? Should the company still be using a predetermined overhead application rate based on direct labor hours or machine hours? A detailed analysis of the cost drivers will answer these questions.Īnother benefit of looking at cost drivers is that doing so allows a company to analyze all costs. Additionally, an increase in technology often raises overhead costs. While the labor cost has changed, this decrease may only be temporary as a labor force with higher costs and different skills is often needed. Advancing technology allows for the now smaller labor force to be more productive than a larger labor force from earlier years. For example, technology has changed the way pharmaceuticals are manufactured. Often, improved technology means less waste of material and fewer direct labor hours, but possibly more overhead. As technology changes, however, the mix between materials, labor, and overhead changes.
The more accurately a company can determine the cost drivers for its products, the more accurate the costing information will be, which in turn allows management to make better use of the cost data in making decisions.
(Figure) shows various costs and potential cost drivers. Each of these costs is considered a cost driver because of the causal relationship between the base and the related costs: As the cost driver’s usage increases, the cost of overhead increases as well. Activity-Based, Variable, and Absorption Costing 34 Describe and Identify Cost DriversĪs you’ve learned, the most common bases for predetermined overhead are direct labor hours, direct labor dollars, or machine hours.
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