## Cost Driver
### Definition
Any factor or activity that significantly influences the level of costs incurred in producing goods or providing services.
### Why Cost Drivers Matter
- They form the basis of Activity-Based Costing (ABC), linking costs to activities rather than simply to labour or machine hours.
- Identifying them improves accuracy of cost allocation and supports better decision-making.
### Key Points
1. Influence on Costs: As the driver level changes, total cost changes correspondingly.
2. ABC Linkage: ABC uses cost drivers to assign overhead costs to products/services based on actual consumption.
3. Measurement: Requires data collection and tracking of relevant activities.
4. Management Decisions: Helps find opportunities to reduce costs by targeting high-impact activities.
5. Activity Management: Beyond cost allocation, managing cost drivers improves productivity.
### Common Examples
| Setting | Cost Driver |
|---|---|
| Manufacturing | Number of machine setups (drives setup costs) |
| Procurement | Number of purchase orders (drives procurement costs) |
| Quality control | Hours spent on product inspection |
| Testing laboratory | Number of tests performed |