What is Activity Driver Analysis?

Activity driver analysis is a formal review of the activity drivers built into an activity-based costing system. An activity-based costing system is a highly-refined method for assigning overhead costs to products, product lines, sales regions, and other cost objects.

The intent of the analysis is to evaluate whether there is an actual causal relationship between the drivers and their associated cost objects. If not, the drivers must be replaced. The analysis also investigates whether different drivers can be used, for which data accumulation is easier and/or less expensive. This can be a major issue, since some drivers require customized data collection systems that are quite expensive. Finally, the analysis should investigate whether costs can be reduced by minimizing certain activities. In total, these analysis activities can result in a much more cost-effective activity-based costing system.

Advantages of Activity Driver Analysis

There are several reasons why a business should conduct a periodic activity driver analysis. First, shifting to activity drivers with a strong causal relationship with cost objects results in a more accurate and defensible assignment of overhead costs. This can result in better costing of cost objects, which could lead to pricing changes or the termination of some products. It is also useful for finding the most cost-effective ways to assign overhead costs to cost objects, which can lower some costs within the accounting department.