Identify activities and choose cost drivers
Select a measurable factor that explains why a cost pool is incurred and how products use it.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.1 covers activity-based costing (ABC), cost drivers, overhead apportionment and allocation, unit cost and selling-price calculations, method comparisons, uses and limitations, and supported decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topic 2.1–2.2 knowledge of fixed and variable costs, overhead absorption, cost-plus pricing and contribution. This A Level pathway compares those methods with activity-based costing.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What should a cost driver measure?
What you will learn
- Define a cost driver
- Match candidate drivers to overhead causes
- Explain the limitations of a weak proxy
Choose a driver with a cause-and-effect link
A cost driver is a factor that causes or is closely associated with the cost of an activity. Set-up costs may be driven by the number of set-ups; inspection costs by inspections; delivery costs by deliveries; and machine-support costs by machine hours if machine time causes the resource use.
A driver should be relevant to the cost pool, measurable at reasonable cost and consistently recorded. A driver that merely correlates with output may misallocate overhead when products demand very different activities.
Avoid convenient but misleading measures
Direct labour hours may be easy to record but may not explain costs caused by set-ups or purchase orders. Selecting a driver should reflect operational knowledge and available evidence, not just the largest dataset.
Some costs are shared or sustaining and do not have a clear product-level cause. If the relationship is weak, disclose the assumption, use a reasonable allocation basis and avoid presenting the result as exact.
Pause and explain
Why might units produced be a poor driver for set-up cost?
Worked example
Set-up staff spend time preparing production batches. Which driver is more direct: units produced or number of set-ups? Explain.
Show the worked solution
- Set-up cost is caused by preparing batches, so count the set-up events.
- Units produced may not reflect batch changes; two products can have similar volume but very different set-up needs.
- Use set-up count if records are reliable, and note the limits of any shared preparation time.
Answer Number of set-ups is the more direct driver for set-up costs when reliable records exist.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A purchasing pool covers $60,000 of order-processing staff costs. The products place 120 and 480 purchase orders. Select a driver and calculate the rate.
Give me a hint
Use the activity that most directly creates the processing work.
Compare my reasoning
- Purchase orders are the relevant driver if each order creates similar processing effort.
- Total orders = 120 + 480 = 600.
- $60,000 ÷ 600 = $100 per purchase order.
Use purchase orders at $100 per order, provided order complexity is reasonably similar.
Look for these in your work
- Select order count as the activity measure.
- Add both product order counts.
- Calculate a $100 rate and state its assumption.
A support pool is $90,000. Product X uses 30 machine hours and 100 inspections; Product Y uses 270 machine hours and 100 inspections. Which driver better explains inspection cost, and why would machine hours distort it?
Give me a hint
Match the driver to the activity that consumes the inspection resource.
Compare my reasoning
- Inspections are the more direct driver for inspection cost.
- Each product uses 100 inspections, so a reasonable inspection allocation would be equal.
- Machine-hour allocation would charge X only 10% and Y 90%, despite equal inspection use.
Inspection count is the more relevant driver; machine hours would distort the pool because inspection use is equal.
Look for these in your work
- Select inspections as the relevant activity.
- Recognise equal inspection use.
- Explain why machine hours produce a mismatch.
A hotel wants to allocate reception costs to rooms using cleaning hours. Explain when this may be reasonable and one limitation.
Give me a hint
Ask whether cleaning hours explain reception activity or merely vary with room use.
Compare my reasoning
- Cleaning hours might be a practical proxy if reception support consistently rises with occupied-room activity and no better records exist.
- But check-ins, guest queries or booking complexity may drive reception effort more directly.
- Test the relationship, disclose the proxy and avoid treating the allocated amount as a precise causal cost if evidence is weak.
Cleaning hours could be a practical proxy if evidence links them to reception effort, but check-ins or guest-service activity may be better drivers.
Look for these in your work
- State the condition supporting cleaning hours.
- Identify a more direct alternative.
- Disclose uncertainty and test the relationship.
Common mistakes
- Choosing a driver solely because it is easy to count
- Using units to allocate costs caused by batch activity
- Assuming correlation proves causation
What can you explain now?
Which is the strongest driver for a delivery cost pool?
Compare with the explanation
Number of deliveries
The number of deliveries most directly reflects use of delivery activity.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Give two qualities of a useful cost driver and one limitation to disclose.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.