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    Accounting Dictionary

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    Cost Driver


    Definition:
    A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs.

    Examples of cost drivers are as follows:

    • Direct labor hours worked
    • Number of customer contacts
    • Number of engineering change orders issued
    • Number of machine hours used
    • Number of product returns from customers

    If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver will be used.