ACCA Performance Management (F5) Certification Practice Exam

Which term describes what causes costs to increase in Activity-Based Costing (ABC) systems?

1. Cost allocation

2. Cost driver

3. Cost recovery

4. Cost center

The correct answer is: Cost driver

In Activity-Based Costing (ABC) systems, the term that describes what causes costs to increase is known as a cost driver. Cost drivers are the factors that trigger costs in an organization and are directly related to the activities that consume resources. For example, if a specific activity like machine setup requires labor hours, the number of setups can be identified as the cost driver for the labor associated with that activity. Understanding cost drivers is critical in ABC because they provide insights into how costs are incurred and help businesses pinpoint the activities that create value and those that do not. This ultimately aids in more accurate product costing and helps organizations make informed decisions about pricing and resource allocation. Effective use of cost drivers can lead to better identification of cost behavior and assist in strategic planning and performance management by linking specific costs to the activities that generate them.