Cost Driver

Any factor that causes a change in the cost of an activity, used to assign indirect costs to products and understand what influences expense levels.

#Revenue and Expenses#Cost Accounting#Management Accounting

Cost Driver

Any factor that causes a change in the cost of an activity, serving as a basis for allocating indirect costs to cost objects and understanding what influences cost behavior.

For instance, in a manufacturing environment, cost drivers might include machine hours for equipment-related costs, number of production runs for setup costs, number of inspections for quality control costs, and number of purchase orders for procurement costs.

Identifying appropriate cost drivers enhances the accuracy of cost allocation, especially in activity-based costing systems. Effective cost drivers have a clear cause-and-effect relationship with the costs being allocated and can be readily measured. By understanding these relationships, managers can focus improvement efforts on controlling the underlying drivers rather than just the costs themselves.