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2 May, 12:57

Identifying Cost Drivers in an ABC system

Patterson makes electronic components for handheld games and has identified several activities as components of manufacturing overhead: factory rent, factory utilities, quality inspections, materials handling, machine setup, employee training, machine maintenance, inventory security costs, and supervisor salaries. For each activity that Patterson has identified, choose a cost driver to allocate that cost. Explain your reasoning.

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  1. 2 May, 16:06
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    Factory Rent : No of days worked

    Factory Utilities: Units of utility consumed

    Quality Inspection : Hours of inspection on production run

    Material Handling : No of orders received

    Machine Setup : Machine hours

    Employee Training : Hours worked

    Machine Maintenance : Machine hours used

    Inventory Security Costs : Finished goods units

    Supervisor Salary : No of workers

    Explanation:

    A cost driver is unit of activity on which cost is allocated. Cost driver is considered as a direct cause of the cost. In ABC costing cost are allocated to the goods based on the cost drivers.
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