A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead , which can be used to minimize overhead costs. Mar Cost drivers are essential in ABC, a branch of managerial accounting that allocates the indirect costs, or overheads , of an activity. Due to sophisticated manufacturing and increased demands from customers, direct labor is no longer the main cost driver of indirect manufacturing overhead.
Cost drivers are the individual activities associated with production that must factor into the overhead structure for a business. Overhead costs have soared to percent or more of total product costs in. Drivers of Manufacturing Overhead Costs. This is done by dividing the estimated overhead costs (from step 2) by the estimated level of cost driver activity (from step 3). Jul Because indirect costs, such as variable overhead , are not directly traceable to production activities, allocate them according to a cost driver.
For instance, cost driver rate might show the ratio of money earned per product sold or cost per business service offered. Divide the activity cost by the volume to find the cost.
