Transaction based Costing - Meaning & Definition

Published in Operations and Supply Chain Terms by MBA Skool Team

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



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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