Cost drivers meaning

cost drivers. elements of a firm's operations which individually and collectively determines the level of the firm's (average or unit) COSTS. The ability to ‘drive’ or ‘manage’ costs down (or contain cost increases) is an important strategic consideration where cost leadership is the key basis of the firm's COMPETITIVE ADVANTAGE over rival suppliers. The cost driver definition implicit driver option lets you use a table to define the driver quantities and driver targets using an implicit pointer to point to a particular table. Use this driver to specify specific subsets of costs such as transaction costs. In accounting, the cost driver definition is a factor that incurs cost. Use cost drivers to allocate variable and indirect costs to production activities or output. Include both indirect costs and direct costs to compute the full cost of production. Because indirect costs, such as variable overhead, are not directly traceable to production activities, allocate them according to a cost driver rate .

An activity cost driver is a component of a business process. Activity cost drivers are used in activity-based costing, and they give a more accurate determination of the true cost of business. According to the most simple definition, a cost driver is the unit of an activity that causes the change in activity's cost. A different meaning is assigned to the term by Michael Porter: "cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it". Cost driver analysis means analyzing the various possible cost drivers for a particular type of cost or 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 making any decisions relating to apportionment of cost, reduction of costs, etc.

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