In this module you learned that variable costs are related to something or some activity. For example, your monthly gasoline expense is directly related to the amount of miles you drive your car each month. The more you drive, the higher your expense. Miles driven can be considered the cost driver of your gas expense. Indeed, the measure of miles you drive each month is what drives the cost of your gas.
A cost driver should be a measurement or activity that is directly related to the variable cost, not an incidental or irrelevant activity. For example, you may be tempted to use the amount of time spent in your car as a cost driver for your gas expense. This would be a poor cost driver because the time you spend cleaning your car or listening to your radio is not related to the amount of gas the car is using, and is therefore not related to or determining your cost of gasoline.
As you prepare or use financial statements, you must be sure the cost driver is appropriate for the cost being reported. Otherwise, you may never get a handle on how to cut costs. In this assignment you’ll consider the appropriate and inappropriate assignment of cost drivers.
Consider a few cost categories reported by an airline:
Flight Crew Expenses
Pick three of the cost categories above. In a brief essay (maximum of 3 paragraphs), give one example of an appropriate cost driver for each of the three cost categories you chose. Explain why your examples are appropriate. Then give an example of a poor cost driver for each category and explain your reasoning.
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