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 will be used.