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.