Cost driver allocation base

 · 34 Describe and Identify Cost Drivers As you’ve learned, the most common bases for predetermined overhead are direct labor hours, direct labor dollars, or machine hours. 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 www.doorway.ru: Patty Graybeal, Mitchell Franklin, Dixon Cooper.  · The cost base must be reasonable and consistently applied. You can’t guess or use budgeted amounts. In addition, you can’t allocate to a funding source just because it has more available funds than other grants or contracts. Choose each cost base using accurate and current data to determine its reasonableness.  · An allocation base is the basis upon which an entity allocates its overhead costs. An allocation base takes the form of a quantity, such as machine hours used, kilowatt hours consumed, or square footage occupied. Cost allocations are mostly used to assign overhead costs to produced inventory, as required by several accounting www.doorway.ruted Reading Time: 2 mins.

The company should also determine the cost allocation base, which is the basis that it uses to allocate the costs to cost objects. 2. Accumulate costs into a cost pool. After identifying the cost objects, the next step is to accumulate the costs into a cost pool, pending allocation to the cost objects. Ideally allocation bases should be cost drivers; that is, there should be a cause and effect relationship between the costs in the cost pool and the allocation base. In practice, some allocation bases do not have this relationship, or the relationship is imperfect. Under these circumstances the accuracy of the cost allocations can be questioned. Significance of Cost Drivers in Cost Accounting. Whatever determines the total cost of a particular activity should be analyzed in-depth to ensure that a proper allocation base is used. Cost drivers follow a cause-effect relationship, and if the relationship cannot be established, then a more relevant driver should be looked for.

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