Cost Driver
Any factor that causes a change in the cost of a business activity or operation.
What is Cost Driver?
A cost driver is any activity or factor that causes costs to be incurred. In activity-based costing (ABC), cost drivers are the specific activities — such as machine setups, purchase orders, or inspection hours — used to allocate overhead costs to products or services more accurately than a simple volume-based measure like direct labor hours. Identifying the right cost drivers reveals the true economics of products and customer relationships, enabling managers to price more accurately, reduce waste, and evaluate profitability. Cost drivers can be volume-based (units produced), transaction-based (number of orders), or duration-based (hours of engineering support).
Example
A contract manufacturer serving both high-volume standard parts and low-volume custom parts discovers that standard parts consume 80% of machine hours but only 20% of engineering change orders. By switching from a single overhead rate based on machine hours to ABC with multiple cost drivers, it finds custom parts are 40% more expensive to produce than previously thought — information that leads to a significant price increase for custom work.