Finding the relevant cost driver

Abstract

The case is about Brijesh, owner of a virgin coconut oil (VCO) manufacturing company, who is trying to estimate the cost per litre of his core product VCO. The analysis requires students to perform cost allocation by examining the role of different cost drivers. The focus of the case is to appreciate the subjectivity involved in allocating overheads under different costing methods ie traditional and activity-based costing. The analysis reveals interplay of cost allocation by using different cost drivers leading to different predetermined overhead rates under traditional costing. The case also enables students to identify different set of activities involved in production of VCO, identify activity-based cost hierarchies and apply activity-based costing to allocate overheads to the cost object. The case is a simplified version of the actual complex situation faced by the case protagonist so that students are able to apply different cost accounting methods. It also enables students to understand role of cost drivers in allocating overhead costs.