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Describing Cost Behavior & Cost Drivers

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1. Refer to Example 1. For the labor wages and depreciation of plant and machinery examples of production costs given in the Example 1, describe their cost behavior in relation to the cost driver listed.

Example 1
Value-Chain Function and Example Costs Example Cost Drivers
Research and development
? Salaries of marketing research personnel, cost of market surveys
? Salaries of product and process engineers
Number of new product proposals

Complexity of proposed products
Design of products, services, and processes
? Salaries of product and process engineers
? Cost of computer-aided design equipment, cost to develop prototype of product for testing
Number of engineering hours

Number of parts per product
Production
? Labor wages
? Supervisory wages
? Maintenance wages
? Depreciation of plant and machinery, supplies
? Energy cost
Labor hours
Number of people supervised
Number of mechanic hours
Number of machine hours

Kilowatt hours
Marketing
? Cost of advertisements
? Salaries of marketing personnel, travel costs, entertainment costs
Number of advertisements
Sales dollars
Distribution
? Wages of shipping personnel
? Transportation costs including depreciation of vehicles and fuel
Labor hours
Weight of items delivered
Customer service
? Salaries of service personnel
? Costs of supplies, travel
Hours spent servicing products
Number of service calls

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The solution explains how to determine the cost behavior for the given cost drivers

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A cost driver is any output measure that causes the use of costly resources. Cost behavior refers to whether the cost is a fixed cost or a variable cost. A variable cost would change in direct proportion to the change in cost driver ...

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