Activity Cost Driver

What is an 'Activity Cost Driver'

An activity cost driver is 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.

BREAKING DOWN '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-Based Costing - ABC

    An accounting method that identifies the activities that a firm ...
  2. Activity Dictionary

    A list of particular activities that are utilized in activity-based ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  4. Activity Capacity

    The degree to which a particular action is expected to perform. ...
  5. Business Activities

    Any activity that is engaged in for the primary purpose of making ...
  6. Activity Sequence-Sensitive

    A calculation used in activity-based costing for determining ...
Related Articles
  1. Economics

    Understanding Operating Activities

    Operating activities are the daily processes conducted by a company to generate income.
  2. Economics

    What are Business Activities?

    Business activities are any actions in which a company engages to make a profit.
  3. Mutual Funds & ETFs

    Want ETFs But Hate To Buy And Hold? Try Active ETFs

    Choosing between passive and active ETFs depends on your beliefs about active management's value.
  4. Mutual Funds & ETFs

    Active Share Measures Active Management

    A 2006 study proves the effectiveness of a new way of sizing up your portfolio manager.
  5. Economics

    Explaining Activity-Based Costing

    Activity-based costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs.
  6. Investing Basics

    The Basics Of Value Chain Analysis

    Value chain analysis establishes an action plan to understand and implement actvities that create values to a firm's clients, resulting in firm profits.
  7. 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 ...
  8. 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 ...
  9. Options & Futures

    Does Slow-And-Steady Win The Investing Race?

    Sometimes the best investing method is a mix of active and passive investing.
  10. Term

    What is Incremental Cost?

    Incremental cost is the added cost of manufacturing one more unit.
RELATED FAQS
  1. What are examples of key operating activities in a company?

    Discover the things that make up a company's operating activities, including examples of some the key operating activities ... Read Answer >>
  2. What are the differences between period costs and product costs?

    Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
  3. How is the marginal cost of production used to find an optimum production level?

    Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine ... Read Answer >>
  4. What are the primary activities of Michael Porter's value chain?

    Understand the primary activities of Michael Porter's value chain, and learn how a company can optimize those activities ... Read Answer >>
  5. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
  6. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center