Video: Cost Drivers and Activity Centers - Quick Refresher

In this lesson, delve into a quick refresher on the role of cost drivers and activity centers in allocating overhead costs. Nick Palazzolo, CPA, reiterates the significance of these elements, crucial for understanding how overhead is distributed based on causal relationships. Through a practical example involving the allocation of accountants' salaries across different factories, he illustrates the allocation process and how it varies with production levels at each location. Furthermore, Nick covers conceptual underpinnings by reexamining other common cost drivers, such as electricity usage, providing clarity on how these factors influence cost allocation in a business setting. This overview serves as a crucial reminder before advancing to more complex topics.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Let's talk about these terms and formulas. Now, this was talked about in our previous lesson, but it's important, so I want to refresh your memory. We have cost drivers, activity centers. These are going to be what we allocate our overhead based on these causal factors. So we allocate a lump sum of overhead, right.

We have just, let's say, to hire all the accountants that work out of one tiny office. These accountants manage all of our big factories across the country. So these accountant salaries would be overhead and we have a big production. So let's say the accountant's salaries are a million dollars. We got a bunch of accountants and that's overhead.

We need to allocate it to these different factories. And how are we going to do that? Well, maybe it's based on how many products each of these factories makes because, well, the more products, the more work the accounts have to do for that particular factory. So if factory A is shut down for the year and factory B produces 95% of all the units and factory C 5%, well, using an allocation method, the activity driver here, we're probably not going to allocate anything here in terms of accountant salaries. B is going to get the majority and then C will get the remaining.

That is the process of allocation.

All right? And yeah, examples of these are going to be what are some cost drivers? Well, the amount of electricity a factory uses in a month determines the price of the electric bill. The wattage hours of electricity are the cost drivers and the electric bill is the price cost. That's just a recap.

Again, I did go over this in the previous lesson. Read through this if you would like, but other than that, let's

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Performance Analysis & Cost Accounting

Module: 4 Concepts, 44 Videos

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