Our main focus here will be Activity-Based Costing (ABC).
Thus, if the costs are inaccurate, the profit forecasts will not be accurate, and the whole accounting system of the particular organization will be subject to errors. Total production costs are used to set the selling prices for particular products. Failure to do so can lead to the closing of a business venture, due to poor cost computation, that may actually be profitable, or at least potentially profitable. In order to make rational business decisions, you require viable costing methods to get the correct cost or a figure which is close enough to the actual cost for you to perform reliable cost/revenue analysis. If the costs equal revenue, then the business is at a point of indifference and it can be closed or continued depending on other variables apart from cost or how costs can possibly be adjusted. If the costs are less than revenue, there is profit and a probability of expansion. If the cost of production exceeds the revenue derived from a sale, there is a great probability of the business closing down. In a business venture, the major determinant of whether there will be continuity or discontinuity is cost.
In such a scenario, the number of units of electricity consumed is a cost driver.Īpplication of a Cost Driver in Computing a Product’s Cost For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. A cost driver is the direct cause of a cost and its effect is on the total cost incurred.
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