Question

Which of the following has the weakest linkage between activity and cost driver? A) B) C) D) E) Model Machine setup Machine maintenance Lighting on shop floor Quality control Materials Handling Cost Driver Number of setups Machine hours Number of kilowatt-hours Square feet of floor space Weight of materials in process

Answer 1

Solution:

A Cost Driver is the factor that creates the cost of the activity. It directly influences the Activity Cost. There should be a direct link between the cost and the activity (i.e cause and effect relationship).

Now, in the given example,

A) The cost incurred in Machine setup is based on the number of setups done. Therefore, there is direct connection between cost driver and Activity.

B) The cost incurred in machine maintenance is linked with the machine hours worked. Therefore, there is direct connection between Cost driver and Activity.

C) The Cost incurred for lighting on shop floor is linked with no.of kilowatt-hours used. Therefore, there is direct connection between Cost driver and Activity.

D) The cost incurred in Quality Control are not usually connected or linked with square feet of floor space. It is generally linked with batch size of products,etc.

E) The cost incurred in the handling of materials is connected with the weight of materials in process. Therefore, there is connection between Cost driver and Activity.

Therefore, Option D has the weakest linkage between Activity and Cost Driver.