ACCA Performance Management (F5) Certification Practice Exam

For long-term variable overhead costs, which factor acts as the cost driver?

1. The number of employees

2. The volume of activity

3. The total expenditure on materials

4. The level of customer service

The correct answer is: The volume of activity

Long-term variable overhead costs are costs that vary with the level of activity over a longer period. The cost driver for these types of costs is the volume of activity. This factor directly impacts the extent to which overhead costs are incurred. As the volume of production or service delivery increases, variable overheads, such as utilities, maintenance, and indirect labor, generally rise because more resources are needed to support the higher level of activity. When managing and budgeting for variable overheads, understanding the relationship between activity volume and these costs is crucial. As business levels fluctuate, so will the associated costs, making the volume of activity a significant indicator of long-term variable overhead expenditures. In contrast, factors like the number of employees, total expenditure on materials, and the level of customer service may influence costs but do not serve as the primary drivers for variable overhead in the same way that activity volume does. These other factors may impact costs in different manners or reflect changes in operational efficiency, but they do not provide a direct correlation to variable overheads like the volume of activity does.