What is Cost Driver Identification?
Cost driver identification is the process of finding the factor that actually causes an overhead cost to rise or fall — such as machine hours, number of orders, or inspections. Picking the right driver is the foundation of accurate cost allocation, especially in Activity-Based Costing.
A cost driver is identified by testing which factor makes a cost move consistently and proportionally: if cost per unit of that factor stays roughly constant across different volumes, it's a valid driver for that cost pool.
- 1↓List activitiesIdentify the major overhead-generating activities in the process.
- 2↓Group into cost poolsCollect the costs tied to each activity into a cost pool.
- 3↓Propose candidate driversList measurable factors that could explain the cost, e.g., orders, machine hours, inspections.
- 4↓Test correlationCheck whether cost per unit of the candidate driver stays consistent across periods or volumes.
- 5Select the driverChoose the factor with the strongest, most consistent cause-and-effect link to the cost.
Step-by-step worked examples
A company's shipping cost rises with the number of orders, not with sales value: 150 orders cost $3,000; 300 orders cost $6,000. Identify the cost driver.
Compare cost behavior against candidate drivers (order count vs. sales $) Cost per order: 3,000/150 = $20; 6,000/300 = $20 (consistent) Cost driver = number of orders shipped
Machine maintenance cost is $10,000 at 500 machine-hours and $16,000 at 800 machine-hours. Identify the driver and its rate.
Check ratio: 10,000/500 = $20/hr; 16,000/800 = $20/hr (consistent) Cost driver = machine hours, rate = $20 per machine-hour
Customer service costs move with the number of support tickets, not units sold: 400 tickets cost $8,000. Find the cost per ticket.
Cost driver = number of support tickets Cost per ticket = 8,000/400 = $20 per ticket
Flashcards
Quick quiz
Q1.A cost driver is best described as:
Q2.Shipping costs rise with order count but not with sales revenue. The cost driver is:
Q3.Which is a sign of a good cost driver?
Q4.Why can relying on a single volume-based driver mislead product costing?
The full card deck, worked steps and AI-tutor support for “What is Cost Driver Identification?” are in Notek — study by hand before your exam.
Common mistakes
Assuming all overhead costs vary with production volume. — Correct: Some costs vary with non-volume drivers like number of setups, orders, or inspections.
Picking a driver just because it's easy to measure. — Correct: Choose the driver with the strongest, most consistent cause-and-effect relationship to the cost.
Using the same driver for every cost pool. — Correct: Different activities often need different, activity-specific drivers.
Never revisiting driver choices once set. — Correct: Re-evaluate cost drivers periodically as operations and processes change.
FAQ
What is a cost driver?
A cost driver is a factor — like machine hours, orders, or inspections — that causes an overhead cost to increase or decrease.
How do you identify cost drivers?
List candidate factors, then check which one makes cost-per-unit stay consistent across different volumes; that factor is the true driver.
What are examples of cost drivers?
Number of orders for shipping costs, machine-hours for maintenance costs, or number of support tickets for customer service costs.
How do you calculate cost per driver unit?
Divide the total activity cost by the total volume of the identified driver, e.g., $10,000 ÷ 500 machine-hours = $20 per hour.