Describe the activity-based costing system and the common cost drivers that could be used

Describe the activity-based costing system and the common cost drivers that could be used.

Activity-based costing is the process of allocating certain costs, usually the component of the manufacturing/factory overhead, to the various cost drivers. The amount of cost allocated to one product depends on the level of hours, batches, or any cost driver associated with it. The common cost drivers include labor hours, machine hours, machine set-up, batches, among others.

How would the organization identify the cost drivers?

The identification of cost drivers depends on the nature of the company and is affected by its operations. There are cost drivers which are applicable to some but are not applicable to others. Determining the cost driver include an assessment and understanding on the entire production process, so as to know which should be applicable to what.

How would the organization use them in the implementation of this system?

The identified cost drivers will serve as divisors of the cost pools. The results obtained will be the cost assigned per product/item.