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What is a Cost Driver?
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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. Examples of cost drivers are as follows:
Direct labor hours worked
Number of customer contacts
Number of engineering change orders issued
Number of machine hours used
Number of product returns from customers
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.
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Activity-Based Costing
Activity-Based Management
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