What best describes a cost driver in ABC?

What best describes a cost driver in ABC?

• A. An overhead cost pool
• B. An activity or factor that generates cost
• C. A fixed asset
• D. A product line

Answer: (B)

In ABC, a cost driver is the activity or factor that causes overhead costs to be incurred. It reflects the cause-and-effect link between resource use and costs and is used to allocate overhead from cost pools to products or services based on how much of the driver each consumes. For example, the number of machine setups or the hours of machine time can drive maintenance or setup costs, so those drivers determine how much of the overhead is assigned to a product. The other options don’t fit as the driver. An overhead cost pool is merely a group of costs to be allocated, not the cause of those costs. A fixed asset is a long-term resource, not something that drives overhead costs. A product line is a cost object—the recipient of allocated costs—not the factor that generates the costs.

In ABC, a cost driver is the activity or factor that causes overhead costs to be incurred. It reflects the cause-and-effect link between resource use and costs and is used to allocate overhead from cost pools to products or services based on how much of the driver each consumes. For example, the number of machine setups or the hours of machine time can drive maintenance or setup costs, so those drivers determine how much of the overhead is assigned to a product.

The other options don’t fit as the driver. An overhead cost pool is merely a group of costs to be allocated, not the cause of those costs. A fixed asset is a long-term resource, not something that drives overhead costs. A product line is a cost object—the recipient of allocated costs—not the factor that generates the costs.