Transaction based Costing

Posted in Operations and Supply Chain Terms, Total Reads: 4266

Definition: 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.

Browse the definition and meaning of more terms similar to Transaction based Costing. The Management Dictionary covers over 7000 business concepts from 6 categories.

Search & Explore : Management Dictionary

Share this Page on:
Facebook ShareTweetShare on Linkedin