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Role of cost drives

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What is the role of cost drivers in an activity-based cost system? Explain how analysis of cost drivers can be useful in identifying inefficient activities and the cause(s) of inefficiency.

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The solution identifies the role and explains and analyzes cost drivers.

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Cost drivers are the factors that cause you to incur expenses. Cost drivers are triggers, or those things, which cause an activity to be performed or an expense to be incurred. To illustrate, consider the example activity of "Determine Time Phased Material Requirements." For this example, you would need to recalculate those requirements whenever the production schedule changes. Thus, "Number of Schedule Changes" would be the cost driver of "Determine Time Phased Material Requirements." As this example implies, there must be a singular cost driver for each activity, or the activity needs to be further decomposed.

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