#ACTIVITY COST EXAMPLES DRIVERS#

The shipment of defective products can dissatisfy customers, damage goodwill and reduce sales and profits. For example, government contracts often specify a price that includes reimbursement for costs plus some profit margin. External failure costs include warranties, replacements, lost sales because of bad reputation, payment for damages arising from the use of defective products etc. If defective products have been shipped to customers, external failure costs arise. For a two-stage ABC system: In Stage 1, costs will be assigned to the different activities. Examples of internal failure costs include cost of rework, rejected products, scrap etc.

#ACTIVITY COST EXAMPLES DRIVERS#

This is a common approach bottom-up cost estimating, for instance. The following are the few examples of Cost Drivers in Activity-Based Costing: Cost Drivers Activity (1) Number of receiving order Ordering (2) Number of deliveries Delivery (3) Number of Purchase orders Order Taking (4) Kilometres travelled per delivery Deliveries (5) Number of customers' visits Customer Visit (6) Number placing orders for. This is the case where cost is determined as a product of time and resource cost per time unit.

Activity durations may also serve as a basis for cost estimates. Internal failure costs are those costs that are incurred to remove defects from the products before shipping them to customers. Activity duration estimates are an input to these methods. It may be very costly for some organizations. Identification of defective products involve the maintaining a team of inspectors. WHAT IS ACTIVITY-BASED COSTING In contrast to traditional cost-accounting systems, ABC systems first accumulate overhead costs for each organizational activity.

All costs associated with the activities that are performed during manufacturing processes to ensure required quality standards are also included in this category. Appraisal costs (also known as inspection costs) are those cost that are incurred to identify defective products before they are shipped to customers.

Activity cost examples