Definition:
An activity driver is a factor that causes a change in the cost of an activity. It’s a measure that is used to allocate overhead costs to products or services based on the activities that consume those costs.
Key points about activity drivers:
- Cost allocation: Activity drivers are used in activity-based costing (ABC) to allocate overhead costs to products or services more accurately.
- Examples of activity drivers: Examples of activity drivers include machine hours, direct labor hours, number of setups, number of inspections, and number of customer orders.
- Correlation: Activity drivers should have a strong correlation with the overhead costs they are used to allocate.
Why are activity drivers important?
- Accurate cost allocation: Activity drivers help to allocate overhead costs more accurately, which can improve decision-making and profitability.
- Cost reduction: By identifying and addressing activities that are consuming excessive overhead costs, businesses can reduce costs and improve efficiency.
In essence, activity drivers are a crucial tool for allocating overhead costs and understanding the factors that drive costs within an organization.
