How can cost accounting identify the most important cost drivers?

2 Why are cost drivers important?

Cost drivers are essential for cost accountants and managers to comprehend how different factors influence the costs of activities, products, or services. By identifying and analyzing cost drivers, they can allocate costs more precisely and equitably to products or services based on their consumption of resources or their contribution to output. Additionally, they can evaluate the effectiveness and efficiency of processes and activities by comparing the actual costs with the expected or budgeted costs based on the cost drivers. Furthermore, cost drivers can help identify and eliminate waste, inefficiency, or non-value-added activities that increase costs without increasing output or quality. Cost reduction strategies or process improvement initiatives that target the most significant or controllable cost drivers can also be implemented. Lastly, performance measures and incentives that align with the cost drivers and organizational goals can be established.

3 How to identify cost drivers?

The process of identifying cost drivers can vary depending on the type, scope, and purpose of the cost analysis, but generally it involves defining the activity or output in focus, identifying the resources consumed or required, classifying those resources into fixed or variable costs, and determining cost drivers for each resource or cost category. Additionally, validation and verification of these cost drivers should be done by using data, observation, or feedback from stakeholders and experts. For example, collecting historical or current data on costs and cost drivers, observing or measuring activities and resources used, and asking for input from stakeholders or experts can all help to ensure accuracy.

4 How to use cost drivers?

Once the cost drivers are identified, they can be used for a variety of purposes, such as cost allocation, estimation, control and improvement. Cost allocation involves assigning costs to products or services based on their consumption of resources or contribution to output. Cost estimation predicts or projects the costs of future activities or outputs based on the expected or planned levels of the cost drivers. Cost control monitors and manages the costs of current activities or outputs by comparing the actual costs with the budgeted or standard costs based on the cost drivers. Lastly, cost improvement reduces or optimizes the costs of current or future activities or outputs by modifying or influencing the cost drivers.

5 Examples of cost drivers

In order to demonstrate how cost drivers can be identified and utilized, here are some examples from different industries or sectors. For manufacturing, cost drivers may include the number of units produced, the hours of labor, the amount of materials, the complexity of the design, the quality of inputs, the number of machine setups, the number of defects, or the number of reworks. When it comes to service delivery, cost drivers may involve the number of customers served, the hours of service, the type of service, the location of service, the quality of service, the number of orders processed, the number of inquiries handled, or the number of complaints received. In retail operations, cost drivers can include the number of units sold, sales volume, product mix, store size and location, customer traffic, number of transactions or returns. Lastly in healthcare providers, cost drivers may include the number of patients treated, type of treatment, length of stay, severity of illness, quality of care, number tests performed or procedures and complications occurred.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?