Activity Cost Driver

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DEFINITION

A factor that influences or contributes to the expense of certain business operations. In activity based costing (ABC), an activity cost driver is something that drives the cost of a particular activity. A factory, for example, may have running machinery as an activity. The activity cost driver associated with running the machinery could be machine operating hours, which would drive the costs of labor, maintenance and power consumption of running the machinery activity.

INVESTOPEDIA EXPLAINS

Activity-based costing is a type of costing that identifies activities within the business and estimates the resources required to fulfill each activity. An activity cost driver is a factor that effects the costs associated with an activity. Activity-based costing allows managers to determine the costs to perform an activity as well as the costs associated with not performing the activity For example, when a production line has to wait for a certain part to arrive from an external distributor or other manufacturing line, the manager can quickly determine the true cost of waiting for the part. Activity cost drivers attempt to provide a more comprehensive view of the actual costs of an activity, such as a manufacturing process.


RELATED TERMS
  1. Activity Driver Analysis

    The identification and assessment of the factors that are involved in the costing ...
  2. Activity Sequence-Sensitive

    A calculation used in activity-based costing for determining the costs associated ...
  3. Activity Center

    A pool of activity costs associated with particular processes and used in activity-based ...
  4. Applied Overhead

    A type of overhead that is recorded under the cost-accounting method. Applied ...
  5. Overhead

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  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production ...
  7. Activity-Based Costing - ABC

    An accounting method that identifies the activities that a firm performs, and ...
  8. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs in every functional ...
  9. Activity-Based Management - ABM

    A procedure that originated in the 1980s for analyzing the processes of a business ...
  10. Fixed Cost

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