Student Case

In Activity-Based Costing (ABC) approach, cost drivers refer to units causally used to assign and trace indirect and expenses of a shared resource related to activities (administration, production, sales, ) on the basis of the consumption that cost objects ( works executed, products, orders, services) put demands on resources (Horngren, Sundem & Stratton, 2002). According to the ABC method, activities are consumed by products and resources are consumed by activities (Cokins & Capusneanu, 2010). Therefore, any factor causing a change in the activity's cost or the rate of consumption of the activity's cost can be considered a cost driver.

In this case scenario, the activities in the division are molding of the products as the main activity, maintenance of the molding machine and supervision of the employees as the secondary activities. The resources include the molding machine itself and the human resource (thirty machine operators, maintenance mechanics and supervisors) and energy utilization and consumable shop supplies (hoses, lubricants), as support resources. The cost drivers in this manufacturing plant are the energy utilization (6.3 kW/hr.), the employees' wages, amount of space used for the activities, rent and insurance costs. Time spent on the whole process is also a cost driver as it indirectly causes a change in the cost of the manufacturing activity.

Part 2

. First, the employees add the cost of the product through salaries and wages paid to them for their services. The molding machine needs to be maintained hence incurring more expenses which act as cost drivers. The energy is a secondary resource but its activity are needed for the running of the machine at the rate of 6.3 kW per hour. The energy utilization must be paid for which indirectly affects the cost of manufacturing. Consumable shop supplies such as the lubricants are needed for the maintenance of the molding machine, the amount of supplies utilized is directly related to the processing time hence the processing time in a month the more the supplies used and in turn the more the cost of production.

It is good to conclude by stating that the key element revolving around cost behavior is the cost driver. This ensures that information obtained is viable and accurate in aiding the company in making better long-term strategic and short-term operational decisions (Horngren et al., 2002). This will eventually

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