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What are the benefits and challenges of using non-financial cost drivers?

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Cost driver analysis and selection is a key process in cost accounting that helps to allocate indirect costs to products, services, or activities based on their consumption of resources. It also helps to identify the factors that influence the cost behavior and performance of an organization. In this article, you will learn what are the benefits and challenges of using non-financial cost drivers, which are measures of cost drivers that are not based on monetary units, such as quality, customer satisfaction, or environmental impact.

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pamela mosley

Finance Systems Administrator
Hasan Birjandi

CEO and Member of Board of Directors at Daneh Chin Bahman Pasargad (DCBP)

1 What are cost drivers?

Cost drivers are the variables that cause changes in the total cost of an activity or a process. They can be classified into two types: financial and non-financial. Financial cost drivers are the ones that are directly related to the amount of money spent or received, such as labor hours, machine hours, or materials. Non-financial cost drivers are the ones that are indirectly related to the monetary value, but still affect the cost behavior and performance, such as defect rates, customer complaints, or energy consumption.

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pamela mosley

Finance Systems Administrator
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Non financial cost drivers are very important to understand the root cause of cost variances. It tells the complete story. For example, the 3rd party manufacturer making a mistake on the a special process creates slowed the efficiency on time it takes to create a product.

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Hasan Birjandi

CEO and Member of Board of Directors at Daneh Chin Bahman Pasargad (DCBP)
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In the restaurant industry, non-financial cost drivers can be an effective way to manage and control costs. These cost drivers include menu design, portion control, kitchen layout, and employee training. By focusing on these factors, restaurant owners and managers can improve efficiency, reduce waste, and increase profitability. However, implementing non-financial cost drivers can also present challenges, such as resistance from employees or customers and the need for ongoing monitoring and adjustment to ensure effectiveness. Using non-financial cost drivers be a valuable strategy for restaurants to control costs and improve operations. Still, it requires careful planning and management to be successful.

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2 Why use non-financial cost drivers?

Non-financial cost drivers can offer several benefits for cost accounting and management. They can help to capture the qualitative aspects of cost behavior and performance that are not reflected by financial measures. They can also help to align the cost allocation with the strategic objectives and values of the organization, such as customer satisfaction, quality, innovation, or sustainability. They can also help to motivate and reward employees for improving the non-financial outcomes that matter for the organization's success.

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Douglas Offermann

Accountability is my passion. Trust is my Goal.
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Technology is driving us toward non-financial drivers but has been around us for a long time. Think Baseball and On-base-percentage or Batting Average. Its the first thing that comes to mind when you think performance, only now we can use this in multiple disciplines including highly professional fields and even in government. There are a drawbacks however. COVID was a good example of the consequences of focusing too much on data. It can actually harm our human need for communication socially, spiritually, and physically. There needs to be balance.

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3 How to choose non-financial cost drivers?

Careful analysis and evaluation is necessary when selecting non-financial cost drivers; criteria such as causality, measurability, relevance, and controllability should be taken into account. The cost driver should have a direct relationship with the cost of the activity or process, be easy and reliable to measure, be meaningful and important for decision-making and management, and be influenced by the actions and decisions of those responsible for the activity or process.

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4 What are the challenges of using non-financial cost drivers?

Using non-financial cost drivers can also pose some challenges and limitations for cost accounting and management, such as the availability and quality of data, the comparability and consistency of data across different units, products, or periods, and the interpretation and communication of results. Obtaining and verifying data for non-financial cost drivers may be difficult or costly, especially if they are not routinely collected or reported by the organization. Furthermore, it may be hard to compare and standardize the data based on subjective or qualitative measures. Additionally, it may be complex or ambiguous to interpret and communicate the implications of using non-financial cost drivers if they are not well understood or accepted by the stakeholders.

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5 How to overcome the challenges of using non-financial cost drivers?

To ensure successful implementation of non-financial cost drivers, it is essential to define and document objectives and rationale, and communicate them clearly to the stakeholders. Moreover, standards and procedures should be established for collecting, validating, and reporting data related to non-financial cost drivers. Additionally, a balanced mix of financial and non-financial cost drivers should be used, while avoiding over-reliance on either type of measure. Finally, performance and impact should be monitored and evaluated, with adjustments and improvements made as needed.

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Douglas Offermann

Accountability is my passion. Trust is my Goal.
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Any emerging field of study requires a fair amount of testing before going live. The real world of technology moves fast. Hence stakeholders tend to rely less on a through review and support the trend/policy before there has been very little input from the broader community. Naturally, diverse focus groups would be a good counter solution.

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What are the benefits and challenges of using non-financial cost drivers?

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1 What are cost drivers?

2 Why use non-financial cost drivers?

3 How to choose non-financial cost drivers?

4 What are the challenges of using non-financial cost drivers?

5 How to overcome the challenges of using non-financial cost drivers?

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