Which of the following statements is true with respect to cost drivers?
A) Overhead costs should only have one cost driver.
B) In labor intensive companies, direct labor hours often serves as the cost driver.
C) When using a cost driver, the same amount of overhead will be allocated to all products.
D) Cost drivers are only used to allocate machine hours.

Question

Quizplus · Accepted Answer

In labor intensive companies, direct labor hours often serves as the cost driver. A cost driver is a factor that drives or causes the incurrence of a cost. Often, the cost driver is a measure of activity such as direct labor hours, machine hours, or units produced. It is not true that overhead costs should only have one cost driver, as some overhead costs may be driven by multiple factors. Furthermore, the amount of overhead allocated to each product will vary based on the amount of cost driver usage, so it is not true that the same amount of overhead will be allocated to all products. Finally, cost drivers can be any measure of activity that drives cost, not just machine hours.

Which of the Following Statements Is True with Respect to Cost