Activity driver definition

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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.

Related AccountingTools Courses

Activity-Based Costing

Activity-Based Management

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 activity drivers are as follows:

  • Number of supplier invoices processed. A large number of supplier invoices influences how many accounts payable employees are needed, along with their associated benefit costs.

  • Number of checks paid. A large number of checks to be paid influences how many accounts payable employees are needed, along with their associated benefit costs. If the checks are being issued by the payroll department, then the number of payroll checks issued has the same impact on the payroll employees.

  • Number of customer invoices issued

  • Square footage used

  • Number of training hours

  • Number of shipments

  • Number of warehouse picks

  • Number of engineering change orders

  • Number of machine hours

  • Number of work orders

  • Number of receiving inspections

  • Number of sales calls. Each salesperson can only make so many sales calls, so the number of sales calls influences the number of salespeople on staff, along with all of their associated travel and compensation costs.