What are Cost Drivers and How to Establish Cost Drivers in your Company?
Cost Drivers Examples: Cost drivers will be characteristics of certain activities or business events that result in business to create costs. The cost at problem frequently will be referred to as cost object. The cost driver provides the basis for cost allocation between various business units that straight benefit from the cost that has been incurred.
Furthermore, businesses could better know the correlation among costs incurred and also the activities that result in them by analyzing their cost drivers. However in identifying cost drivers, cost objects might appear related to various activities.
Your business should select these cost drivers that correlate mainly with cost objects. The cost objects should be first identified to establish the cost drivers. Determine the cost object. The goal of getting cost driver would be to better distribute the expense of target cost objects between the cost beneficiaries. For business that encounters regular material managing duties, for instance, how to better allocate the full material-managing cost to various working units can be challenging. The business could then establishing cost driver to help distribute the full material managing costs to various working units.
Investigate potential cost drivers by getting set the target cost object first. Valid cost drivers should show causal relationship among specified activity and also the actual cost incurred. Management might think about them as alternative cost drivers. For example, how many boxes of materials relocated and also the weight of materials handled will be different means of quantifying the material-managing activities. The working units might track the work in terms of full amount of boxes of materials handled or full weight of materials handled, using exactly same material managing instance.
In addition, you need to establish cost drivers correlation. Identifying cost drivers between potential choices depends on how good every cost driver might correlate with the specific cost objects. Management might for example identify more than one potential cost drivers, suggesting that costs for every working unit will be measured either by how many units were relocated or the actual materials weight by unit. Unit that handles more materials will probably create high managing cost.
Evaluate the management control effect. If full managing cost was allocated to individual working units in line with the amount of materials relocated by every unit – the unit that handles numerous boxes will be allocated high cost than it actually incurred.
Cost Drivers Examples, Tools and Templates
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Choosing the right cost driver might positively affect management control. This basically will result in one unit to burden and subsidize specific cost for additional unit. Using material weight as cost driver lets the same and reasonable cost distribution for most units.
The smaller unit would not have working incentive, consequently, since the more units are being handled. Conclude on cost measurements, using it as cost driver doesn't offer credible cost correlation. At the same time, using how many units to gauge managing cost is easiest way for identifying cost drivers and allocated costs like the ones in the ABC Activity Based Costing example.
Executives and management should as well think about if the cost measurement provided by potential cost driver will be both precise and simple to use, to establish cost drivers. This can always be easily refined – once you have your cost drivers identified and tested. You can test various scenarios like the ABC case studies above. For easy break down and analysis of cost drivers with full ABC report use the ABC Excel software template.