Activity driver

An activity driver is something that influences the cost of an operation. There may be several activity drivers that contribute to the incurrence of an expense. Activity drivers are used to allocate the costs in secondary cost pools to primary cost pools, as well as to allocate the costs in primary cost pools to cost objects. Examples of activity drivers are:

  • Number of supplier invoices processed

  • Number of checks paid

  • Number of customer invoices issued

  • Square footage used

  • Number of training hours

  • Number of shipments

  • Number of warehouse picks

  • Number of engineering change orders

  • Number of machine hours

  • Number of work orders

  • Number of receiving inspections

  • Number of sales calls

A defensible activity driver is one where there is a strong causal relationship between the cost pool and the activity. A causal relationship means that one variable in a data set has a direct influence on another variable. Thus, if the activity does not occur, the cost in the related cost pool is not incurred.

Few companies already compile information about activity volumes, so deciding to use a new activity driver for cost pool allocation purposes means that a business will have to create a new data collection system. To avoid this cost, see if there is an existing activity driver already in use that has a reasonable causal relationship with the cost pool in question, and use that instead.

Related Courses

Activity-Based Costing