Activity cost driver definition
/What is an Activity Cost Driver?
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. For example, it is quite possible that both operator labor hours and the time spent processing parts on a machine are activity drivers inherent to the manufacture of a product.
Activity cost drivers are not required in the formulation of financial accounting information. Instead, they are used in management information systems, where members of the management team examine cost drivers to see if there are ways to strip costs out of the business. Ideally, a continuing analysis of cost drivers will be one of the key management actions taken to enhance the profitability of an organization.
When to Use Activity Cost Drivers
Activity cost drivers should only be used when the cost of collecting the cost driver information is less than the benefits to be gained from doing so. It makes little sense to set up a group of activity cost drivers if management does not act on the resulting information. This can mean that activity cost drivers will only be tracked for a period of time, until management has reduced the associated costs to the greatest extent possible.
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Examples of Activity Cost Drivers
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.