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
Here are a number of examples of activity cost drivers, broken down by business function:
Manufacturing
Number of machine setups. Used for the costs associated with preparing equipment for production runs.
Machine hours. Used for the costs related to operating machinery.
Number of production runs. Use for the costs of initiating a batch of products.
Inspection hours. Used for quality checks during or after production.
Material movement occurrences. Used for costs incurred in transferring raw materials or products within a facility.
Logistics
Number of shipments. Used for the costs tied to the transportation of goods to customers or between facilities.
Weight of goods transported. Used for the costs related to shipping heavy or bulk products.
Number of orders processed. Used for the costs incurred in processing customer orders.
Distance traveled. Used for the costs associated with delivering goods over long distances.
Sales and Marketing
Number of customer visits. Used for the costs from sales representatives traveling to meet clients.
Number of marketing campaigns. Used for the costs of running specific advertising or promotional efforts.
Leads generated. Used for the costs associated with acquiring potential customers.
Customer inquiries handled. Used for the costs incurred to address customer queries.
Service and Support
Number of service calls. Used for the costs tied to technicians visiting clients for installations or repairs.
Hours of training provided. Used for the costs of employee or customer training sessions.
Help desk tickets resolved. Used for the costs related to solving technical or customer support issues.
Administrative Activities
Number of invoices processed. Used for the costs associated with accounts payable or receivable tasks.
Payroll transactions. Used for the costs of managing employee salaries and benefits.
Number of reports prepared. Used for the costs tied to generating financial or operational reports.
Hours spent on compliance. Used for the costs of adhering to regulations, or to assist audits.