ECONOMICS

Detailed explanation-1: -There may be multiple cost drivers associated with an activity. For example, direct labor hours are a driver of most activities in product manufacturing. If the expenditure for labor is high, this will increase the cost of producing all company products or services.

Detailed explanation-2: -When deciding which driver to use in terms of allocating indirect cost, consider the cause-and-effect relation between the cost and the driver. In addition, consider whether or not the cost driver activity is easily measurable. It is also necessary to consider the cost behavior of the relevant cost.

Detailed explanation-3: -There are 3 types of cost drivers: Volume Drivers, Unit Price Drivers, and Fixed Cost Drivers (Overhead).

Detailed explanation-4: -A cost driver is the direct cause of a cost and its effect is on the total cost incurred. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity.