COST DRIVERS EXPLANATION
ACTIVITY-BASED Activity-based cost drivers are the
factors that lead to changes in an
activity. These drivers are identified
by performing activity analysis, which
is a detailed description of a firm's
specific activities in its operations.
The analysis includes every step in
manufacturing or providing a service.
For each activity, a cost driver is
determined to explain how the costs
associated with that activity change.
VOLUME-BASED Volume-based cost drivers are the
amount of goods produced or
services provided, which influences
the overall cost. It is known to vary in
direct proportion to the quantity of
products manufactured or sold. Such
cost drivers are crucial element
because they help businesses
determine the true cost of production
and sales.
STRUCTURAL AND EXECUTIONAL Structural cost drivers, pertaining to
strategic decisions, have a lasting
impact on the overall costs of a
business. These decisions are made
with a long-term view to minimize
costs and maximize profitability.
Executional cost drivers, on the other
hand, are focused on short-term
decisions aimed at reducing costs in
the key operational areas of a firm,
such as manufacturing, raw materials
sourcing, and general operations. As
such, a comprehensive
understanding of both structural and
executional cost drivers is essential
for businesses in their pursuit of
sustainable profitability and long-
term success.
EXAMPLES
An example for cost driver is the
number of students paying their
tuition fees directly to the school,
which determines the cost of
providing cashier services by the
school’s cashier. In this context,
the school's cashier serves as a
cost activity and the number of
students paying their tuition fees
acts as a cost-driver. This cost-
driver relationship indicates that
the cost of cashier services will
increase or decrease as the
number of students paying their
tuition fees changes.
Increasing volume-based cost
drivers in a manufacturing
company such as labor hours,
machine hours, and units
produced results in proportional
cost increases with higher output
volume.
For instance, the installation of
new machinery which aims to
lower the overall cost of
production is considered a
structural cost driver. On the
other hand, if the machinery is
installed to increase the flow of
products and decrease the costs
associated with the operations of
the company, it is regarded as an
executional cost driver. Since,
executional drivers are inversely
correlated with unit cost.