Activity Cost Driver

Activity costs are a core element of cost accounting, where division managers or dividers of labor or resources are trying to figure out what things actually cost them.

A movie studio is rented for $100,000 a month. The sequel to Dr. Strangelove is being shot on it, and that production uses a third of the time. Sharknado 9: The Diapering is also being shot on that stage using two-thirds of the time. So a simple activity cost driver would be to divide the cost of that studio into thirds, attributing $33,000 and change to Strangelove and $66,000 and change to Sharknado.

But what if Sharknado leaves a horrible wet mess after they shoot, and Strangelove leaves nuclear waste on the stage, needing special cleanup crews imported from Chernobyl? The nuclear waste takes longer to clean than the water, so perhaps the activity cost drivers should be attributed differently. That is, maybe there's a different driver of cost than simply time shooting in the studio. Maybe it should be multipled by some factor greater than one that then accounts for the cleanup cost and mess of each. Maybe nuclear waste time carries an incremental factor of 1.3 and cleanup of water carries a 1.1.

Why is all this necessary? Because next month, a cooking show might be in there, which requires almost no cleanup (aside from a little splattered brownie batter), and it probably shouldn't be burdened with all of these activity cost driver premiums that are needed for the other production entities.

Fair? Well, we guess it depends what they're cooking.