cost driver

Why does the purchasing department's cost go up some months and down others? Not because of how many finished products leave the factory, but because of how many purchase orders the staff had to place. The number of purchase orders is what makes that cost move. A cost driver is exactly that: the underlying factor whose changes cause a particular cost to rise or fall. Find the real driver, and you understand — and can fairly charge — the cost.

A cost driver is the activity or factor that causally determines the amount of a cost, and in activity-based costing it is the measure used to assign each activity cost pool to products. Drivers come in types tied to a hierarchy of activities: unit-level drivers (machine hours, units made) rise with each unit; batch-level drivers (number of setups, number of orders) rise with each batch regardless of batch size; product-level drivers (number of product designs, engineering change orders) rise with each product line; and facility-level costs (plant rent) have no good driver at all. Using a batch-level driver like 'number of setups' correctly charges a product that runs in many small batches more than one made in a single long run, even if both produce the same total units.

Cost drivers matter because they are the bridge between what a company does and what it spends — identifying them is the heart of both activity-based costing and good cost control. If you want to cut a cost, you attack its driver: fewer setups, fewer orders, fewer inspections. The crucial distinction often missed is between a true causal driver and a mere allocation base of convenience: direct labor hours may be easy to measure, but if labor doesn't actually cause most overhead, it is a poor driver and will mis-cost products. Picking drivers that genuinely cause cost is what makes a costing system informative rather than merely tidy.