cost driver

A factor that can causes a change in the cost of an activity.An activity can hav
e more than one cost driver attached to it.
For example, a production activity may have the following associated
cost-drivers: a machine, machine operator(s), floor space occupied, power consum
ed, and
the quantity of waste and/or rejected output.A factor that influences or contrib
utes to the expense of certain business operations.
In activity based costing (ABC), an activity cost driver is something that drive
s the cost of a
particular activity. A factory, for example, may have running machinery as an ac
tivity.
The activity cost driver associated with running the machinery could be machine
operating hours,
which would drive the costs of labor,maintenance and power consumption of runnin
g the machinery activity.
Activity-based costing is a type of costing that identifies activities within th
e business and estimates
the resources required to fulfill each activity. An activity cost driver is a fa
ctor that effects the costs
associated with an activity. Activity-based costing allows managers to determine
the costs to perform an activity
as well as the costs associated with not performing the activity For example, wh
en a production line has to wait
for a certain part to arrive from an external distributor or other manufacturing
line, the manager can quickly
determine the true cost of waiting for the part. Activity cost drivers attempt t
o provide a more comprehensive view of
the actual costs of an activity, such as a manufacturing process.