A cost driver is any factor that, when altered, results in a shift in the expenses being incurred.
To put it another way, it’s anything that can have an impact on the costs your company incurs. Any observable factor with a direct or indirect bearing on a company’s costs might be considered a cost driver.
It refers to everything except output volume that affects the price per unit of a product.
A cost driver connects the resources used in a process to the final product. It can be used to adjust the price of another item.
How Will This Affect Your Company?
The fundamental goal of analyzing cost drivers is to figure out which areas need more focus and how to give them that focus.
To put it another way, the cost associated with generating a particular outcome can be traced back to each factor that played a role in generating that outcome.
Managers can use this technique to assess the costs of running the firm, pinpoint their origins, and plan appropriate measures to cut or eliminate those costs.
One simple kind of cost-driving is tying the number of outside employees’ hours to the volume of business.
When you get more customers coming through the door, you’ll need to expand your marketing team to keep up with the demand.
Diverse Causes of Expenses
Costs can be affected by three distinct variables: volume, unit price, and fixed costs (or overhead).
Effectors of Pace
One type of variable cost is known as a “volume driver,” and it includes factors like:
All work expended in the making and sale of a product or service falls under this category of expenditures.
Wage rates for individuals or groups of workers are also included. Since an increase in inflation typically results in higher labor rates.
Costs that shift depending on output and revenue, such as raw materials, wages, and manufacturing overhead.
The more that are manufactured and sold, the more expensive they become overall.
For businesses in the service industry, nothing is more important than expanding their customer base.
There will be a rise in expenses as a result of the larger customer base that your business must support if it expands the range of goods and services it offers.
This is why a retail establishment will hire more people in response to a surge in foot traffic.
The more you make, the more it will cost per unit.
Retailers and restaurants with many locations can benefit from using this cost driver.
Adding extra stores is an expensive way to expand into new markets and win over more customers.
Motives for Unit Costs
A shift is occurring in the per-unit cost of a product or service.
Costs incurred by consumers
Raw materials and other products sold in bulk, such the culinary ingredients used in fast food restaurants and the price of gas at gas stations, are examples of this type of cost driver.
Compensation for work
Hourly wages, salary, and other monthly payments. Their rates increase proportionally with the volume of work they perform.
Other Costs of Components
Electricity and water costs (for commercial buildings), land value, and insurance premiums are all examples of inputs.
Influencers of Fixed Expenses (Overhead)
This type of fixed cost driver does not change with production or sales volume. Case in point:
1. Staffing costs and rent for the administrative building
Stay the same regardless of whether or not the quantity shipped is increased. Employee expenses that don’t directly affect product output or sales volume are typically categorized as “fixed costs.”
Costs of coverage second
Stay the same even if production volume is doubled.
Insurance premiums can go up from the yearly amount you’ve been paying if your business has experienced a boost in sales volume.
Consultant payments and license/permit costs
Unaffected by changes in output or sales volume.
The expense of depreciation
As long as business operations remain constant at 100%, your costs will remain unchanged regardless of the volume of goods produced or sold.
Fixed-asset depreciation is the fifth item.
Such as structures, machinery, and tools.
Budgeting for Variables
Your cost drivers can be evaluated from three perspectives:
Measures of Volume
Quantity produced or sent is divided by total cost to get a cost per unit. Using this method, you may calculate the current unit costs for your different offerings and customer types.
The quantity produced or delivered is measured following a predetermined event, such as the beginning of business activities, the opening of a new branch office, or the closing of a store.
Using this method, you may calculate the current price per unit of output.
Indices in Steps
You take a look at the rates at which your cost drivers change as you do things like launch, add a branch, and shut down a location.
Once you have the numbers, you can observe how your cost per unit has changed as a result of different approaches to production.
The ups and downs in production or sales volume are reflected in what we call “cost drivers,” which have a direct impact on a company’s bottom line.
Most of these expenses are constant throughout time, although they may also be proportional to volume.
There are three ways to quantify your cost drivers: volume indices (which count the number of units produced), fixed indices (which are taken at a constant time interval), and step indices (which are taken at regular intervals).