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.