Activity driver definition
/What is an Activity Driver?
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. It is an essential component of activity-based costing.
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.
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Which Activity Drivers to Use
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. In short, it is critical to use only the most cost-effective activity drivers. Otherwise, the cost of administering a cost accounting system will be unacceptably high.
Examples of Activity Drivers
Examples of a number of common activity drivers are noted below:
Number of machine hours. This driver measures the total hours machines are used in the production process. It directly affects maintenance costs, energy usage, and depreciation expenses tied to machinery operation.
Number of setups. Each time a machine or production line is reconfigured for a new product or batch, it requires setup time and labor. More setups increase downtime and resource use, raising overall production costs.
Number of purchase orders. Every purchase order processed requires administrative time and system resources. A high volume of purchase orders can lead to increased procurement and processing costs.
Number of customer orders. Processing customer orders involves order entry, billing, and fulfillment activities. More orders drive up administrative and operational expenses related to sales processing.
Number of inspections. Quality checks and inspections consume labor and equipment resources. The more inspections performed, the higher the associated quality control costs.
Number of miles driven. In distribution or service industries, the distance vehicles travel influences fuel, maintenance, and driver labor costs. Greater mileage leads to increased transportation expenses.
Number of batches produced. Producing goods in multiple small batches instead of fewer large ones requires more setup, cleaning, and tracking. This increases production complexity and costs per unit.
Number of employees supervised. Supervision costs rise with the number of workers under management, requiring more managerial time and resources. Larger teams often demand additional training, oversight, and communication efforts.
Number of product variants. Offering a wide range of product variations increases complexity in production, inventory management, and order fulfillment. Each variant may require unique materials, documentation, and handling processes.
Number of deliveries made. Each delivery involves transportation planning, vehicle use, and often labor costs. Frequent or small-scale deliveries raise logistics and distribution expenses.