From the course: Accounting Foundations: Managerial Accounting

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Identifying cost drivers

Identifying cost drivers

From the course: Accounting Foundations: Managerial Accounting

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Identifying cost drivers

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- All right, once the overhead cost activities have been identified, the individual overhead items analyzed, and the cost pools computed, it is time to identify measurable cost drivers. Cost drivers are the things that drive your costs, hence the name. Cost drivers are used to track how costs of activities are related to specific cost objects, such as products or divisions. In other words, we are asking the question what activities are driving the incurrence of overhead costs? As you can see here, Lily has determined that the four general activities that generate overhead costs are driven by four specific cost drivers. The act of producing a gallon of ice cream of any flavor results in certain overhead costs being incurred. Thus, those costs are allocated based on the number of gallons of each flavor that are produced. Second, there are certain costs associated with producing a specific batch of ice cream. These…

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