This document discusses cost drivers, which are factors that influence the level of costs. It defines cost drivers and provides examples such as number of purchase orders or machine hours affecting purchasing or maintenance costs. Cost drivers have a cause-and-effect relationship with total costs - the driver is the cause and incurred costs are the effect. The document also categorizes cost drivers as structural, organizational, or activity-based and provides determinants for each type. Finally, it discusses cost driver analysis and the importance of understanding the causal relationship between activities and associated costs.

1. Cost Drivers
By Twinkle Sharma
M.com final
year student

2. COST DRIVERS
 A Factor or variable which is going to effect the
level of cost.
 An Activity which is responsible for that
particular cost occurrence.

3. Relationship of Cause and Effect
Cost Driver has a cause and effect relationship with the total cost. The
cost driver is the ‘cause’ and the ‘cost incurred’ is the effect of it.
If we take an example of fuel cost of running a car, the cost driver (cause) would be
‘No. of Kms Run’ and the total cost (effect) would be ‘total cost of fuel’. The
relationship is quite clear. Higher the no. of km run, higher would be the total cost of
fuel.
In simple terms, cost driver can be defined as the driver of cost. Just like a driver
drives the car, cost driver drives the cost.

4. DEFINITION OF COST DRIVERS
Given by Chartered Institutes of Management Accountants,
“Cost Driver is a factor which is influencing the
level of cost and it is widely used in Activity
Based Costing.”

5. Examples of cost drivers
Department / Cost Centre / Cost Pool / Activity Cost Drivers
Purchase department or Purchasing Activity No. of Purchase Orders created.
Set Up Cost for Machine No. of Machine Set Ups
Repairs and Maintenance of Machines No. of Machine Hours Run
Quality Check Department or Cost No. of Tests conducted

6. COST DRIVERS -WHY?
 They are a link between a pool of costs
in an activity centre and the product
 Therefore in order to trace overheads
cost to products , appropriate cost
drivers should be identified.

7. TYPES OF COST DRIVERS
Morse, Davis and Hartgraves suggest that cost drivers should
be divided into three categories :
 Structural Cost Drivers
 Organisational Cost Drivers
 Activity Cost Drivers

8. 1. Structural Cost Drivers
 They are the fundamental choices about the size and the
scope of operations and technologies employed in delivering
products or services to customers.
 The decisions affecting structural cost drivers are made
infrequently and once made. Once a decision about the
structure of organisation is made it becomes committed to a
course of action that will be difficult to change.

9. Following are some determinants which are to
be kept in mind as they can let the existence of
SCD :
 Size of Stores
 Type of Construction
 Location of the Stores
 Kind of technology used in the stores

10. 2. Organisational Cost Drivers
 They are choices concerning the organisation of activities and
involvement of persons inside and outside the organisation in
decision making.
 These drivers influence the costs by affecting the types and
costs of activities performed to satisfy customer needs.
 The decisions that affect the organisational cost drivers are
made within the context of previous decisions affecting
structural cost drivers.

11. Determinants to be kept in mind
 Prefer limited number of suppliers
 Authorising employees to make decisions
 Deciding components of a product to fit them in most correct manner
 Reorganising the existing equipment in the factory so that sequential operations
are nearer.

12. 3. Activity Cost Drivers
 These are the activities related to specific units of work performed to serve
customer needs that consume costly resources.
 The customer may be outside the organisation such as a client of an advertising
firm or inside the organisation such as an accounting office that receives
maintenance services.
 These activities consumes resources and resources cost money. In managing costs,
the management makes choices concerning structural and organisational drivers.
These decisions affect the types of activities required to satisfy customers needs.
 Different types of activities have different costs, so the management’s decision
ultimately affect activity costs and profitability

13. COST DRIVER ANALYSIS
 Cost driver analysis means analysing the various possible cost drivers for a
particular type of cost or an activity etc. and explaining their cause and effect
relationship between the activity and cost driver.
 It is advisable to use the most correlated cost driver for taking any decisions
relating to apportionment of cost, reduction of costs etc. But, it should be noted
that correlation is just a way to prove the relationship.
 Ultimately, cause and effect relationship is a must.
 Just for example, normally, material cost and labour cost will have a correlation.
This does not mean labour cost can be a cost driver for material cost.

14. Thank You