Cost Drivers - Activity Based Costing, Cost Management Video Lecture | Cost Management - B Com

so now that we've covered management
accounting very generally and now that
I've equipped myself with some
deliciously potent hazelnut coffee we
can actually go ahead and talk about
cost drivers so cost drivers are very
related to costs and costs are very
related to management accounting because
of course sometimes management
accounting is otherwise known as cost
accounting so we're going to start off
by talking first about costs and then
transitioning into cost drivers so I'm
guessing the most elementary kind of
example of a cost that you had in your
everyday life as a kid was probably
chocolate chocolate or chocolate bars I
guess I can put that I have enough space
chocolate bars okay so this is one type
of cost and the cost driver the cost
driver is the activity that drives up
the cost so one cost driver we could
come up with is the number of chocolate
bars so we can clearly see here as the
the activity goes up as the activity or
the number of chocolate bars because
cost drivers are the activity that cause
the cost to become incurred so as the as
the number of chocolate bars increases
the cost will increase as well so it
drives the cost up and that's kind of
where they derived a term from to call
it cost drivers because the activity
drives up the cost and we could have
used a different cost driver we could
have used a cost driver that fitted with
a cost as well like like weight in
chocolate the thing here is if we used
weight in chocolate let's say that the
average chocolate bar is I don't know
100 grams I think that's probably too
much but we'll say it's 100 grams and
let's say that one chocolate bar that
was purchased was actually 99 grams
while the other one was a hundred and
one gram so I guess this company hasn't
really standardized their process well
if we had the if we had a I guess you
could say the cost of each gram was
maybe a cent and then we multiplied it
by the total amount of grams the cost
would be different in each in each
scenario then the first one would be 99
cents and then the second one it would
be one dollar and a cent so we would
have reported it as that even though we
purchased it for for one dollar each so
even though each chocolate bar was $1
our price was off by a penny in both
scenarios so you can see that some cost
drivers actually work better than others
and I can give you probably even a
better example of a less effective cost
driver maybe the number of nuts in the
chocolate bar so maybe if we're
purchasing a certain chocolate bar like
a Snickers
for example I'm not sure if there's a
standard amount of nuts that go into a
Snickers bar but I'm going to guess
there probably is and let's just say in
this scenario that there is and so in
one in the one chocalate bar maybe
there's like 10 nuts and in the second
there is 15 nuts and maybe each each
each nut can be at a cost of I guess
what would mode work here I guess
10 cents so in the first scenario we
would have the right price but in the
second scenario it would be a dollar 50
even though we purchased two chocolate
bars for a dollar so as you can see
certain cost drivers can move away from
the actual true cost which is why we
need to always try and find the best
cost driver to use and that's actually
going to be known as something called
the r-squared value or the coefficient
of determination you don't have to worry
about it too much at the moment we're
actually going we're actually quite a
few tutorials off from this but this
this number will actually indicate which
cost driver we should probably use in a
certain cost function so for now just
remember that cost drivers are V or the
activity that drive up costs and we talk
about volume related cost drivers and
that a greater amount of volume is going
to drive up the cost and I guess I can
give you a couple quick examples before
I leave you and let's say labor costs
probably the best best cost driver for
this would be the amount of labor hours
and if you use something like machine
hours obviously that is not as great of
a as a cost driver to calculate labor
costs if we had material costs I'm
thinking that the best cost driver would
be the the kilograms of material used
and I guess one final one maybe research
and development we could say the number
of products in development will
determine our cost in R&D so as you can
see here there's there's many different
cost drivers you can come up with
however some are more are more
reflective of the cost than others so in
the next tutorial we'll be talking about
I think variable and fixed cost so I'll
see you guys in the next one
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