Developing Cost Drivers in Formula-Based Costing

Figure 5-1 illustrates the fundamentals of Formula-Based Costing. Study it well. This could be the magic formula that opens the doors to a new way of thinking about measuring cost.

Figure 5-1. Understanding formula-based costing.

Points to Remember in Formula-Based Costing:

  1. The logical end of a formula is the Revenue Driver. Sometimes it is hard for a team to determine where to stop stretching a formula. The general rule is that a formula should end with a revenue driver. In other words, what is the ultimate source of revenue for which this cost is being incurred?

  2. There is only one Revenue Driver ...

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