Cost Drivers

Cost drivers can be defined as factors which have a cause-effect relationship with costs. Cost drivers are any factors which cause a change in the costs of work performed in an organisation or in a process. Cost driver analysis is the examination, quantification and explanation of the cause effect relationship between the cost drivers and the indirect costs of an operation.

In response to the need for more accurate and useful cost information, the approach of activitybased costing (ABC) was developed which makes use of multiple cost drivers. In assigning indirect costs to profit objects (products or services) ABC determines cost drivers to measure the utilisation of overhead resources by cost objects. Overhead costs are then allocated to cost objects in proportion to their cost driver demand.

However, the careful selection of cost drivers is the key to achieve the benefits of activity-based cost calculation systems. Thus special attention shall be given to the methods supporting the exact elaboration of these drivers. It means that the technology related performance flows and their indicators describing the examined business area are to be modeled and evaluated according
to the selected methodologies.

To make the improved costing systems operative the company has to undertake a process of selecting appropriate cost drivers. The selection process involves the examination of cost items and their causes in order to identify candidate cost drivers, furthermore to explain and – as far as possible – quantify the driver-cost relationships. At least one cost driver and often a set of multiple cost drivers are selected from the available candidates for a cost item. So the implementation of ABC requires numerous cost driver selection decisions. The number and complexity of candidate drivers from which to choose can cause considerable selection problems for the decision maker

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