Cost driver

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 should be used.

Related Courses

Activity-Based Costing
Activity-Based Management
Cost Accounting Fundamentals