Learn about activity cost drivers - the factors that influence the costs of performing various activities within a business. Understand how these cost drivers impact your company's expenses and discover strategies to better manage them for improved profitability.
An activity cost driver refers to any factor that triggers a change in the cost of an activity, thus impacting overall costs. It can be a measure of the frequency or intensity of the activity, and is used to allocate costs based on the consumption of resources or the creation of specific outputs.
Identifying activity cost drivers is crucial for effective cost management in organizations. By understanding the factors that influence costs, companies can prioritize and allocate resources efficiently.
There are various activity cost drivers depending on the nature of a business:
In manufacturing, the number of units produced can be an activity cost driver. As production increases, more resources are required, such as labor, raw materials, and overhead costs. This cost driver helps determine the overhead allocation per unit produced.
For businesses that heavily rely on machinery, the time spent using a specific machine can be an activity cost driver. The wear and tear on the machine, energy consumption, and maintenance costs are directly related to the number of hours in operation.
In logistics companies or distribution centers, the number of shipments or deliveries can drive costs. Each time a shipment is dispatched, costs such as transportation, packaging, and handling are incurred. This cost driver allows organizations to comprehend the impact of shipment frequency.
When analyzing costs, activity-based costing (ABC) systems utilize cost drivers to allocate costs accurately.
By measuring the specific activities and determining their cost drivers, organizations can identify areas where costs can be reduced. This insight allows for optimized decision-making, identifying which activities to focus on for maximum efficiency and cost-effectiveness.
Activity cost drivers play a crucial role in understanding cost allocation and analyzing cost patterns within an organization. By identifying and monitoring these drivers, companies can make more informed decisions, optimize resource allocation, and improve overall cost management.
Previous term: Activity Based Management
Next term: Activity Ratios
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