Question

Discuss any 2 (two) criterion which are often used to evaluate cost drivers.     [8 marks]

Answer 1

There are three criteria often used to evaluate cost drivers; they are:

• Economic plausibility. Do the cost driver and the level of costs seem to be related? Does it make sense that an increase in the independent variable will cause an increase in the costs?

• Goodness of fit. Are the differences between the actual costs and predicted costs small? In a regression analysis, goodness of fit is measured by the r2 statistic.

• Significance of independent variable. If the regression line (or total cost line) has a steep slope, this indicates a strong relationship between the cost driver and the costs incurred.