how activity cost drivers work
a cost driver affects the cost of specific business activities in abc an activity cost driver influences the costs of labor maintenance or other variable costs cost drivers are essential in abc a branch of managerial accounting that allocates the indirect costs or overheads of an activity multiple cost drivers may be associated with an activity for example direct labor hours are a driver of most activities in product manufacturing if the expenditure for labor is high this will increase the cost of producing all company products or services if the cost of warehousing is high this will also increase the expenses incurred for product manufacturing or providing services keeping tabs on cost drivers makes it easier to determine the actual cost of production and make more accurate financial projections more technical cost drivers are machine hours the number of engineering change orders the number of customer contacts the number of product returns the machine setups required for production or the number of inspections if a business owner can identify the cost drivers then the business owner can more accurately estimate the true cost of production for the business and then determine the per item and batch level costs 