Transaction based Costing - Definition & Meaning
What is Transaction based Costing?
It is done by classifying certain overhead activities into cost pools . Then individual drivers are assigned and proportion of resources consumed are used in calculating the total cost. Since labour hours which was used as a standard cost driver for all the activities now comprises of just 5-10 % of costs after mechanization . It becomes all the more in assigning proper drivers since labour hours are not related to the overheads incurred . Transaction based costing becomes even more important if the drivers are not quantifiable. It also helps in identifying the products or services which are consuming the higher costs.
Examples :
Calculating the manufacturing overheads involved in operating machine . If the set up costs are found to be 20,000 and total overheads are 150 ,000
Total setup cost =150,000
The driver for the set up cost is the number of batches
No of batches = 500
Set up cost per batch = 300
In addition to this is the running cost
Overheads for running cost = Total overheads – Overheads for setup
=150 ,000- 20,000
=130,000
The driver for running cost is machine hours = 2600 Hrs
Operating Cost per machine hour = 500
Total cost = Set up cost per batch + Operating Cost per machine hour = 300 +500 = 800
Hence, this concludes the definition of Transaction based Costing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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