A road contractor has been using kilometers of road constructed as a cost driver. Based on last years costs he estimates that he can build a kilometer of road for $3 million. The county has recently asked him for an estimate to build 20 kilometers of road.
Before making his bid based on his $3 million per kilometer estimate, he goes to his accountant for advice. The accountant has analyzed last year's costs much differently. She has divided last year's costs into different activities and chosen a cost driver and measured its useage last year. He estimates follow:
Activity Cost Cost Driver
Surveying $10 Hours 200,000 hours
Excavating 200 Tons of Earth Moved 2,000,000tons
Bridges 120 Number of bridges 60 bridges
Grading 80 Number of Kilometers 200 kilometers
Gravel 30 Tons of gravel 750,000 tons
Paving 160 Number of kilometers 200 kilometer
We will need to calculate the total amount for the relevant activities to build the road as follows: -
Activity Cost ...
This solution is comprised of a detailed explanation and calculation to compare Single Cost Drivers to Activity Based Costing.