A - Activity cost driver
Activity cost drivers are the specific actions that cause certain business costs to rise or fall. They’re central to activity-based costing (ABC), helping businesses assign indirect costs more accurately based on what actually drives them.
Definition of activity cost driver
An activity cost driver measures how much demand is placed on an activity, which then drives cost. It’s used to assign overhead and indirect expenses to products or services based on how much of each activity they consume.
Explanation: what is an activity cost driver?
Cost drivers help you break down overhead based on what’s really happening inside your business. In ABC systems, indirect costs like admin, factory overhead, or utilities are assigned based on the real triggers, like machine hours, inspections, or order volume.
When you track cost drivers, you can see which processes eat up resources—and where to streamline or cut back.
Real-life example of activity cost driver
A furniture company uses machine hours as its cost driver.
- Chairs require 1,000 machine hours; tables need 500.
- Total overhead is $75,000. That’s $50 per machine hour.
- Chairs get $50,000 in overhead; tables get $25,000.
This method reflects actual resource use, not guesses.
Why are activity cost drivers important?
They give you clarity. When you understand what drives costs, you can reduce waste, improve efficiency, and make better pricing and budgeting decisions. It’s how smart businesses stay lean and profitable.
About CoCountant
At CoCountant, we use activity cost drivers to help you run a tighter operation. We dig into your processes—production, service, logistics—and find out what’s driving costs. Then we align your financials to reflect reality.
That means cleaner books, better decisions, and growth that’s backed by numbers instead of assumptions. Whether it’s cost allocation or process optimization, our bookkeeping and accounting services help you manage every dollar strategically.