What Is an Activity Cost Driver?

An activity cost driver is an action that triggers higher or lower variable costs for a business. Sometimes referred to as a causal factor, it is associated with the managerial accounting concept of 澳洲幸运5官方开奖结果体彩网:activity-based costing (ABC). Companies can monitor activity cost driver⛎s to boost efficiency and company profits.

Accounting for Cost Drivers

In ABC, an activity cost driver influences the costs of labor, maintenance, or other variable costs. ABC is a branch of 澳洲幸运5官方开奖结果体彩网:managerial accounting that allocates the indirect costs, or 澳洲幸运5官方开奖结果体彩网:overheads, of an activity. Multiple cost drivers ma𝓡y be associated with an activity. Types of cost drivers include:

• Direct labor hours: A driver of most activities in product 澳洲幸运5官方开奖结果体彩网:manufacturing. If the expenditure on labor is high, this will increase the cost of producing all products or services.
• Warehousing costs: If the cost of warehousing is high, it increases the expenses incurred for product manufacturing or providing services.
• Machine hours: A technical 澳洲幸运5官方开奖结果体彩网:cost driver that includes machine setups required for production.
• Engineering change orders: Costs incurred when a 澳洲幸运5官方开奖结果体彩网:specification is revised.
• Machine setups: Costs required for production and the number of production inspections.

Example

When a factory machine requires periodic maintenance, the maintenance cost is allocated to the produc൲ts produced by the machine. For example, the cost driver selected is machinery hours.

After every 1,000 machine hours, there is a maintenance 💫expense of $500. Therefore, every machine hour results in a $.50 (500 ÷ 1,000) maintenance cost allocated to the product being manufactured based on the cost driver of machine hours.

Using cost drivers simplifies the allocation of manufacturing overhead and helps determine the true cost of one product. Management uses the cost of a product to determine the price of the pღroduct. For this reason, the selection of accurate cost drivers directly affects an entity’s profitability and operations.

The Bottom Line

Ex🅷amining activity cost drivers helps companies reduce unnecessary expenses and pinpoint the costs of an individual product or service. Businesses that can assign varia🥀ble costs may develop a better pricing strategy and increase profits.