Identify cost drivers used in Activity Based Costing from the following:

A. Volume

B. Transaction

C. Intensity

D. Currency

E. Duration

Choose the correct answer from the options given below: 

The correct answer is B, C and E only.

Key Points

• Transaction: In the context of activity-based costing (ABC), a transaction can be a cost driver because it represents a discrete activity that consumes resources. For example, each time a customer order is processed, certain costs are incurred. Therefore, the number of transactions (or orders processed) can drive costs in this context. The more transactions a company has, the higher its costs will likely be.

• Intensity: Intensity can serve as a cost driver in ABC as it measures the level of effort or resources needed to carry out an activity. In essence, it refers to the extent to which resources are utilized. A process that is more intense will likely require more resources and thus incur more costs. For example, a manufacturing process that uses high-intensity labor or materials would have higher costs than one that uses these resources less intensively.

• Duration: Duration refers to the amount of time required to complete a specific activity or process. In the context of ABC, it can be a cost driver because the longer an activity takes, the higher the costs associated with it. This could be due to higher labor costs, increased utility costs from keeping facilities running for longer, or a greater depreciation of equipment due to increased use. For example, a lengthy machine operation that takes a significant amount of time will have higher costs due to the longer use of the machine, the energy it consumes, and the labor needed to run it.

Additional Information

• Currency: In the context of ABC, currency itself is not a cost driver. Rather, it’s the unit in which costs are measured. It does not cause costs to increase or decrease. Changes in currency exchange rates might affect the costs of internationally sourced materials, but this is more aptly considered a cost factor or influence, rather than a direct cost driver.

• Volume: Generally, volume, meaning the number of units produced or the volume of production, is a key cost driver in traditional costing methods. In ABC, however, the focus is more on activities as cost drivers, rather than volume. Nevertheless, in some cases, the volume or quantity of production can indirectly be a cost driver if it influences the number or intensity of activities, but it's not typically considered a primary cost driver in ABC.