High School

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Selection of a cost driver will affect:

A. How managers make decisions.
B. How costs are allocated.
C. How direct costs are measured.
D. How managers make decisions and how costs are allocated.

Answer :

Selection of a cost driver affects how managers make decisions and allocate costs in an organization. Cost drivers are crucial factors that determine the proper allocation of indirect costs across cost centers, directly influencing management strategies. The appropriate allocation method must be chosen by managers to reflect the complexity of service delivery, particularly in the public sector. Therefore, the correct option is a and b.

Selection of a cost driver predominantly impacts how managers make decisions and how costs are allocated within an organization. A cost driver is a factor that significantly influences the costs associated with a particular activity. For instance, in a copier cost center, the number of copies made is an intuitive cost driver that can be used to allocate indirect costs. In essence, the choice of a cost allocation basis will determine the way indirect costs are distributed across various cost centers.

An organization's financial management strategy depends on understanding direct costs, which are under the control of its management, and indirect costs, which are assigned by the management. Management decisions are influenced by this understanding, as it affects both the direct handling of expenses and strategic approaches such as forming partnerships to benefit from economies of scale and access to new technologies. Without a grasp of cost drivers and appropriate allocation bases, organizations may struggle to distribute indirect costs effectively, which is often the case in the public sector.

Different methods exist for cost allocation, ranging from treating indirect costs as their own cost centers to distributing them based on a common denominator shared by all affected centers. Managers must select allocation methods that reflect the nuances of their service delivery, particularly in public and non-profit organizations where outputs are not easily quantifiable and outcomes can substantially vary.

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