What is Activity Driver Analysis
Activity driver analysis identifies and assesses the factors involved in the costing of goods and services and is part of activity-based costing (ABC). ABC is an accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products. Activity driver analysis compares the different activity drivers and associated costs in an attempt to reduce costs and increase efficiency and helps management trace the cost of certain activities to cost objects.
Breaking Down Activity Driver Analysis
An ABC system recognizes the relationship between costs, overhead activities and manufactured products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods. Activity driver analysis identifies the different factors that drive costs associated with an activity. Activity driver analysis factors include causal relationships between drivers and associated cost objects, whether certain drivers are easier to measure and whether certain activities are more costly. Driver analysis ultimately allows management to evaluate alternative activity drivers that might be more cost efficient in terms of machine hours, labor, materials, etc.