Surrogate Activity Driver
A surrogate activity driver is a measure or factor used in activity-based costing (ABC) when the ideal, or primary, activity driver is difficult to measure or is cost-prohibitive to monitor. In ABC, activity drivers are used to allocate overhead costs to products or services based on the activities that drive those costs.
In situations where the primary driver isn’t easily measurable or is too expensive to track, a surrogate driver that has a close correlation with the primary driver can be used as a substitute. The surrogate driver acts as a proxy, assuming that it moves in tandem with the primary driver.
Example of a Surrogate Activity Driver
Let’s explore the concept of a surrogate activity driver with a hypothetical scenario involving a bakery.
Scenario: “Delightful Bakery” produces various custom cakes. They’ve adopted the Activity-Based Costing (ABC) model to allocate overhead costs to each cake type based on the activities involved. One of the overhead activities they’ve identified is “Decoration.”
Primary Activity Driver: The most accurate way to allocate decoration costs would be based on “hours of decoration time” because some intricate designs take longer than simpler ones.
However, tracking the exact hours spent decorating each cake is problematic for the bakery:
- It’s time-consuming to record.
- The decorators may not consistently log their hours.
- The overhead of managing this tracking system might outweigh its benefits.
Given these challenges, Delightful Bakery seeks an alternative, surrogate activity driver.
Surrogate Activity Driver: After analyzing past orders and their decoration times, the bakery notices a pattern: the number of colors used in a cake’s decoration correlates well with the time taken. Cakes with more colors usually take longer because they involve more intricate designs and detailed work.
Thus, “number of colors used” becomes the surrogate activity driver for the “Decoration” activity.
Cost Allocation: Let’s say, based on historical data, Delightful Bakery determines that the cost of decoration is approximately $10 for every color used in a cake.
- A simple birthday cake using 2 colors would carry a decoration cost of $20.
- A more elaborate anniversary cake with 5 colors would be allocated a decoration cost of $50.
This example demonstrates how Delightful Bakery, by using the surrogate activity driver “number of colors used,” can still allocate its decoration overhead costs in a manner reflecting the effort and resources consumed, without having to track the exact hours of decoration time for each cake.
