Activity Cost Driver

AAA

DEFINITION of 'Activity Cost Driver'

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 Cost Driver'

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 ...
  2. Activity Sequence-Sensitive

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

    A pool of activity costs associated with particular processes ...
  4. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  5. Activity-Based Management - ABM

    A procedure that originated in the 1980s for analyzing the processes ...
  6. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs ...
Related Articles
  1. Budgeting

    Do I Need A Personal Accountant?

    You know you need to keep your personal finances better organized. Should you hire professional help, and if so what kind?
  2. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  3. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  4. Investing

    What are Direct Costs?

    Direct costs for finished goods refer to the items and services directly used in production. Other costs such as rent and insurance for the production site are indirect costs. These costs may ...
  5. Investing

    What is Contingent Liability?

    A contingent liability is an amount that might have to be paid in the future, but there are still unresolved matters that make it only a possibility. Lawsuits and the threat of lawsuits are the ...
  6. Investing

    What's Accrued Interest?

    Accrued interest has two meanings. In accounting, it is interest that has been earned, but the time for payment has not yet occurred.
  7. Investing

    What is Absorption Costing?

    Absorption costing is an accounting method primarily used in manufacturing. In absorption costing, the cost of a manufactured product includes the direct costs plus an apportioned share of the ...
  8. Economics

    What Must The UK Do To Keep North Sea Oil Afloat?

    The UK government may need to take drastic action to ensure the viability of UK North Sea offshore oil production amid high costs and shrinking margins.
  9. Budgeting

    Quickbooks vs. Quicken

    QuickBooks and Quicken are two of the most widely used financial management tools in the world. Determine which one is right for you.
  10. Investing

    Understanding Accumulated Depreciation

    Depreciation is a rough approximation, in dollar terms, of the wear and tear on an asset. So the accumulated depreciation is the aggregate of the wear and tear on the asset from all prior time ...

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center