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

Examples of cost drivers are direct labor hours worked, the number of customer contacts made, the number of engineering change orders issued, the number of machine hours used, and the number of product returns from customers.