Cost Driver in Accounting: Definition, Analysis & Example

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  • 0:00 What Is a Cost Driver?
  • 0:44 Definition of Cost Driver
  • 1:03 Examples of Cost Drivers
  • 2:18 Analyzing Cost Drivers
  • 3:36 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we will learn about cost drivers. We will define the term, look at examples, and learn the steps a company might take when analyzing a cost driver. The lesson will conclude with a summary and a quiz.

What Is a Cost Driver?

Let's imagine that you have just opened a new business. At your place of business, you sell various electronics ranging from computers to televisions to car stereos. Since electronics always seem to be in demand, you hope to have had great success with your new business. However, after about three months in business, you realize that the costs that you incurred are significantly higher than anticipated. These costs have begun to cut into your profits, and it's time to figure out what's happening.

You soon realize that a particular brand of car stereos have had an abundance of returns, because the volume button does not work well. It was at that time that you also realized that those returns have become a cost driver.

Definition of Cost Driver

So you may be wondering, what is meant by the term cost driver? Well, a cost driver is a unit of activity that causes a business to endure costs. So, your business was incurring costs via returns by customers. Therefore, the cost driver for your business was products returned by customers.

Examples of Cost Drivers

Let's take a minute to look at some common costs drivers that affect businesses:

  • Direct labor: this is exactly what the name indicates - the employees needed to work for a business
  • Setting up equipment: Many businesses need machines in order to conduct business, often required to manufacture a product
  • Special instructions: Sometimes customers have specific demands about products. When this happens, a company incurs costs.
  • Handling and storage: if a company needs to store its products, it may have to pay for that storage. If a company has to pay employees or companies to handle products, like getting them ready to ship, there are also costs.
  • Components: A company may be incurring costs based on the components in the products it produces. Obviously, the more components in a product, the higher the costs. From our example earlier, stereos have a lot of components, which means they cost more money to produce than, say, a rubber ball.
  • Machine hours: Like mentioned earlier, machines are often used to produce goods. The amount of hours that a machine runs to make those products is often a cost driver for companies.
  • Returns: When customers return products, businesses have to endure costs, such as restocking the item.

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