An activity cost driver is an action that triggers the incurrence of a cost. A cost driver causes variable expenses to be incurred. There may be more than one activity cost driver that initiates the incurrence of a variable expense. When a management team has a comprehensive knowledge of activity cost drivers, it can make better decisions that enhance the profitability of an organization. Activity cost drivers are not required in the formulation of financial accounting information. Instead, they are used in management information systems.
Examples of activity cost drivers are direct labor hours, square footage used, the number of customer change orders, and the number of machine setups required.