Answer to Question #180060 in Accounting for Donsai

Question

Briefly explain the term "Volume Based Drivers"

Answer 1

Volume Based Drivers are cost drivers that assign costs through the run activities only. Ordering costs change with the number of orders, not necessarily the number of units or volume ordered. The cost to order one unit is approximately the same as an order for 100 units since they are virtually identical. Several factors determine volume-based drivers, such as output units, direct labor hours, and machine hours.

Volume-based drivers are most closely related to the volume of outputs and the need for overhead capacity, and they are easy to measure because they are directly product-related. Structural cost drivers are determined by a company's choices regarding its underlying economic structure. Key cost drivers at this level include the organization's scale and scope, the level and type of technology, and its product strategy concerning the variety of products offered to customers.

It is an advantageous method since it offers accurate product cost, information about cost behavior is well monitored, it helps in tracing activities for the cost object and overhead costs. It helps in cost management and better decision-making. The demerits associated with volume-based overhead cost systems include; increase as product diversity increases because the cost system is designed to cost products in the aggregate. Secondly, if not related to unique manufacturing characteristics in different operations and uses a common plant-wide or departmental cost driver may ignore.