The use of either plantwide rates or departmental rates assumes that a product’s consumption
of overhead resources is related strictly to the units produced. But what if
there are overhead activities that are unrelated to the number of units produced? Setup
costs, for example, are incurred each time a batch of products is produced. A batch may
consist of 1,000 or 10,000 units, and the cost of setup is the same. Yet, as more setups
are done, setup costs increase. The number of setups, not the number of units
produced, is the cause of setup costs. Furthermore, product engineering costs may depend
on the number of different engineering work orders rather than the units produced
of any given product. Both these examples illustrate the existence of
non-unit-based drivers. Non-unit-based drivers are factors, other than the number of
units produced, that measure the demands that cost objects place on activities. Thus,
unit-level drivers cannot assign these costs accurately to products. In fact, using only
unit-level drivers to assign non-unit-related overhead costs can create distorted product
costs. The severity of this distortion depends on what proportion of total overhead
costs these non-unit-based costs represent. For many companies, this percentage can
be significant—reaching more than 40 or 50 percent of the total. Clearly, as this percentage
decreases, the acceptability of using unit-based drivers for assigning costs
increases