Hospital activity cost examples drivers#
Hospital activity cost examples driver#

Your friend has more complicated ordering, storage, product testing (one of the more desirable jobs, nevertheless), and packing in containers. Further, assume your ice cream is sold only in one liter containers, while your friend sells ice cream in various containers. Imagine that each month you produce 100,000 gallons of vanilla ice cream and your friend produces 100,000 gallons of 39 different flavors of ice cream. One of the lessons of activity-based costing has been that the more complex the business, the higher the indirect costs.

Or imagine the activities involved in making a complex product such as an automobile or computer. Imagine the activities involved in making a simple product like a pizza-ordering, receiving and inspecting materials, making the dough, putting on the ingredients, baking, and so forth. This step requires people to understand all of the activities required to make the product. StepВ 1 is often the most interesting and challenging part of the exercise. The next section describes these four steps. For example, the cost per purchase order times the number of orders required for Product A for the month of December would measure the cost of the purchasing activity for Product A for December.

Hospital activity cost examples driver#

Assign costs to products by multiplying the cost driver rate times the volume of cost driver units consumed by the product.The cost driver rate could be the cost per purchase order, for example. Compute a cost rate per cost driver unit.Each activity could have multiple cost drivers.

Hospital activity cost examples drivers#

For the purchasing materials activity, the cost drivers could be the number of orders placed or the number of items ordered. A cost driver is an activity or transaction that causes costs to be incurred.

Identify the cost drivers associated with each activity.

Purchasing materials would be an activity, for example.

Identify the activities that consume resources and assign costs to those activities.

Overhead would be allocated to each product as follows (use the POHR calculated above at $100 per machine hour):ДЄctivity-based costing requires accountants to use the following four steps:

At the end of January, High Challenge had used 1,500 machine hours for the Touring bicycle product line and 500 machine hours for the Mountain bicycle product line.

The predetermined overhead rate of $100 per machine hourВ is calculated as:.

High Challenge has decided to allocate overhead on the basis of machine hours. Department A had estimated overhead of $2,000,000 and used 20,000 machine hours. High Challenge Company allocated manufacturing overhead costs to the two products for the month of January. The touring bicycles product line is a high-volume line, while the mountain bicycle is a low-volume, specialized product. This video will discuss the differences between the traditional costing method and activity based costing.ДЄssume High Challenge Company makes two products, touring bicycles and mountain bicycles.

Step 3: Apply overhead throughout the period using the actual amount of our base and the predetermined overhead rate (POHR) calculated in step 2. The formula we use for this is: Predetermined Overhead Rate (POHR) = This is typically calculated at the end of the year to be used during the following year. Step 2: Calculated a predetermined overhead rate using estimates. These can be anything a company decides but most common are direct labor cost, direct labor hours, direct material usage or machine hours. Step 1: Determine the basis for allocating overhead or indirect costs. In a traditional costing method, we calculate one plantwide allocation rate or we could calculate an overhead allocation rate for each department.