Appleford Ltd is a furniture manufacturer. It has a small range of products. Its manufacturing processes are characterised by a high level of automation. Appleford Ltd decides to choose a volume-based cost driver for its indirect manufacturing costs. Which of the following cost drivers is most appropriate?

Question

Quizplus · Accepted Answer

In a highly automated production system, the number of machine hours is the most appropriate cost driver for indirect manufacturing costs. This is because in such a system, the use of machines is likely to be the major source of indirect costs such as electricity, maintenance, and repairs. Therefore, the number of machine hours used can be a reliable indicator of the level of indirect costs incurred. The number of units produced, direct labour hours, and the number of manufacturing batches are less appropriate cost drivers in such a system.

Appleford Ltd Is a Furniture Manufacturer