Cost drivers and allocation in activity-based costing systems

¶ … Allocations

What drives consumption of costs?

In Activity-Based Costing (ABC), consumption of costs is driven by a company's activities (Investopedia, LLC, n.d.), such as production, administration and sales (Cokins, 2010, p. 9). The company's product consumes activities, whether main or supporting activities, and those activities consume company resources (Cokins, 2010, pp. 9, 11). In that context, a cost driver is something that drives the cost of a company's activity (Investopedia, LLC, n.d.); it is a "factor which generates occurrence of resource (capacity) expenses" (Cokins, 2010, p. 8). For example, a manufacturing business may have an activity of running machinery, which will have cost drivers such as machinery operating hours, labor, maintenance and power consumption (Investopedia, LLC, n.d.). That same manufacturing company may also have the activity of release into production, which will have cost drivers such as the number of products (Cokins, 2010, p. 13). Cost drivers are chosen according to two major criteria: optional (chosen) and specifying (determined) (Cokins, 2010, p. 9); and they are chosen according to: the degree of complexity, diversity and variation a company's product; the accuracy of calculations, leading to a reasonable number of cost drivers; and the usefulness of information, which is detailed and accurate enough for rational cost drivers (Cokins, 2010, p. 10).