Cost Driver - Wikipedia, The Free Encyclopedia

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    Cost driverFrom Wikipedia, the free encyclopedia

    According to CIMA, cost driver is any factor which causes a change in the cost of an activity. A cost driver

    is the unit of an activity that causes the change in activity's cost. Examples: In marketing, cost drivers are

    Number of advertisements, Number of sales personnel etc. In Customer service, cost drivers are Number of

    service calls attended, number of staff in service department, number of warranties handled, Hours spent on

    servicing etc...

    "Cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or

    interrelationships that affect it" (M. Porter). Therefore we could assume that the cost drivers determine the

    cost behavior within the activities, reflecting the links that these have with other activities and relationships

    that affect them.

    The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be

    incurred. Activity Based Costing is based on the belief that activities cause costs and therefore a link should

    be established between activities and product. The cost drivers thus are the link between the activities and

    the cost.

    Generally, the cost driver for short term indirect variable costs may be the volume of output/activity; but for

    long term indirect variable costs, the cost drivers will not be related to volume of output/activity.

    In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the

    change in business structures, technology and thereby cost structures it was found that the volume of output

    was not the only cost driver. Some examples of indirect costs and their drivers are: indirect costs for

    maintenance, with the possible driver of this cost being the number of machine hours; or, the indirect cost of

    handling raw-material cost, which may be driven by the number of orders received; or, inspection costs that

    are driven by the number of inspections or the hours of inspection or production runs.

    John Shank and Vijay Govindarajan list cost drivers into two categories: Structural cost drivers that are

    derived from the business strategic choices about its underlying economic structure such as scale and scope

    of operations, complexity of products, use of technology, etc., and Executional cost drivers that are derived

    from the execution of the business activities such as capacity utilization, plant layout, work-force

    involvement, etc. Resource cost Driver is measure of quantity of resources consumed by an activity. It is

    used to assign cost of a resource to activity or cost pool. Activity Cost Driver is measure of frequency and

    intensity of demand placed on activities by cost object. It is used to assign activity costs to cost objects.

    To carry out a value chain analysis, ABC is a necessary tool. To carry out ABC, it is necessary that cost

    drivers are established for different cost pools.

    References

    Strategic Cost Management: The New Tool for Competitive Advantageby Shank and Govindarajan

    Cost Accounting: a managerial emphasis- 12a Edio (2005) by Charles T. Horngren, George Foster

    e Srikant M. Datar

    "Competitive Advantage", by Michael Porter.

    t driver - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Cost_driver

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    See also

    Activity-based costing

    Fixed cost

    Variable cost

    Value chain

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    Categories: Management accounting Costs Production economics

    This page was last modified on 28 March 2014 at 07:45.

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    t driver - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Cost_driver

    2 9/27/2014 8:38 AM