Cost driver

Definition

A cost driver is a factor that causes or influences the cost of an activity. It helps in identifying and allocating costs more accurately in cost accounting and management.

5 Must Know Facts For Your Next Test

1. Cost drivers are critical for Activity-Based Costing (ABC) as they link activities to costs.
2. Common examples of cost drivers include machine hours, labor hours, and number of setups.
3. Accurate identification of cost drivers can improve decision-making and cost management.
4. In Job Order Costing, understanding cost drivers is essential for assigning overhead costs to specific jobs.
5. Variable and fixed costs can have different cost drivers; variable costs often rely on production volume, while fixed costs might depend on time or capacity utilization.

Review Questions

• What role do cost drivers play in Activity-Based Costing?
• Can you name three common examples of cost drivers?
• How do cost drivers affect the allocation of overhead costs in Job Order Costing?

Related terms

Activity-Based Costing (ABC): A costing method that assigns overhead costs to activities based on their use of resources.

Job Order Costing: A costing system that accumulates manufacturing costs separately for each job.

Overhead Costs: Indirect costs associated with manufacturing that cannot be traced directly to a specific product or job.