Activity Cost Driver

MoneyBestPal Team
The factors that cause the costs of an activity to vary.

Activity cost drivers are the variables that affect how much an activity costs. They are utilized in activity-based costing (ABC) to allocate costs to goods and services in accordance with the tasks needed to provide them. Transaction drivers and duration drivers are the two different categories of activity cost drivers.

The frequency with which an activity is performed is a transaction driver. Transaction drivers include things like the volume of orders, bills, or calls from clients. Despite being simple to measure and record, they might not accurately capture the complexity or variance of the activity.

Duration drivers are the length of time necessary to complete an action. Duration drivers include things like machine setup, inspection, and maintenance times. Although they are more challenging to monitor and document than transaction drivers, they better convey the complexity and volatility of the activity.

The type of activity, the data availability, and the cost-benefit analysis of utilizing various drivers all influence the choice of activity cost drivers. The objective is to choose the drivers that most accurately represent how the activity uses resources and generates expenses. Activity cost drivers enhance decision-making and performance evaluation by assisting managers in locating the sources of cost fluctuation, enhancing cost estimates, and bettering cost allocation.