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Cost driver
A cost driver is a structural factor which determines the cost of an activity or a change in its cost. The Chartered Institute of Management Accountants defines a cost driver as:
[A] cost driver is any factor which causes a change in the cost of an activity,[citation needed]
although a different meaning is assigned to the term by the business writer Michael Porter, who states:
"cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it".
Porter's approach defines a "cost driver" not just as a simple variable in a function, but as something that changes the function itself. For example, the driver "economy of scale" leads to different costs per unit for different scales of operation (a small cargo vessel is more expensive per unit than a large bulk carrier), and the driver "capacity utilisation" leads to greater costs per unit if the capacity is under-utilised and lower costs per unit is the utilisation is high. In general, the cost driver for short term indirect variable costs may be the volume of output/activity; but for long term indirect variable costs, the cost drivers will not be related to volume of output/activity.
The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. Activity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product. The cost drivers thus are the link between the activities and the cost of the product. To carry out a value chain analysis, ABC is a necessary tool. To carry out ABC, it is necessary that cost drivers are established for different cost pools.
In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. John Shank and Vijay Govindarajan divide cost drivers into two categories:
Resource cost Driver is a measure of the quantity of resources consumed by an activity. It is used to assign cost of a resource to activity or cost pool.
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Cost driver
A cost driver is a structural factor which determines the cost of an activity or a change in its cost. The Chartered Institute of Management Accountants defines a cost driver as:
[A] cost driver is any factor which causes a change in the cost of an activity,[citation needed]
although a different meaning is assigned to the term by the business writer Michael Porter, who states:
"cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it".
Porter's approach defines a "cost driver" not just as a simple variable in a function, but as something that changes the function itself. For example, the driver "economy of scale" leads to different costs per unit for different scales of operation (a small cargo vessel is more expensive per unit than a large bulk carrier), and the driver "capacity utilisation" leads to greater costs per unit if the capacity is under-utilised and lower costs per unit is the utilisation is high. In general, the cost driver for short term indirect variable costs may be the volume of output/activity; but for long term indirect variable costs, the cost drivers will not be related to volume of output/activity.
The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. Activity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product. The cost drivers thus are the link between the activities and the cost of the product. To carry out a value chain analysis, ABC is a necessary tool. To carry out ABC, it is necessary that cost drivers are established for different cost pools.
In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. John Shank and Vijay Govindarajan divide cost drivers into two categories:
Resource cost Driver is a measure of the quantity of resources consumed by an activity. It is used to assign cost of a resource to activity or cost pool.