What is a Cost Driver?

A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. A large number of cost drivers may be used within an activity-based costing system. If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver should be used.

Examples of Cost Drivers

Here are several examples of the cost drivers that you could use in an activity-based costing analysis:

Number of customer contacts made. Used to allocate customer service or sales support costs, since more contacts typically increase resource usage.
Number of direct labor hours worked. Tied to labor-intensive activities, this helps assign labor-related overhead where manual work drives costs.
Number of engineering change orders issued. Reflects design or development effort, assigning costs related to product modifications or improvements.
Number of machine hours used. Common in manufacturing, it attributes costs such as machine depreciation, maintenance, and energy consumption.
Number of product returns from customers. Used to allocate quality assurance or return processing costs, especially relevant for warranty or reverse logistics.
Number of production orders initiated. Helps track setup and scheduling costs that occur with each new production run, regardless of batch size.
Number of purchase orders issued. Assigns procurement or supply chain overhead, with more orders generally indicating higher administrative effort.

Each of these cost drivers helps refine cost allocation, improving accuracy over traditional costing methods by linking overhead to actual business activities.