Activity cost driver is a factor or a certain indicator that affects the certain activities within a business and also affects the cost related to those activities. As the name indicates the activity cost drivers drives or influences the cost of a certain business activity. An example of activity cost driver can be termed as machine hours associated with the manufacturing machine. The machine hours means the number of hours a machine is kept running for manufacturing purposes. Machine hours is a direct activity cost driver that affects the cost associated with labor, use of electricity, time consumed by manufacturing employees and the maintenance of the manufacturing machine.
Activity cost drivers play an important role in calculating the cost on activity biases. We know that activity based costing is a type of costing that calculates the cost of a process on the biases of activities involved in that process. With the help of activity based costing we can identify all the activities related to the business and the cost of resources, labor, power and other things involved in that activity.
With the help of activity cost driver we can easily find out the affect of the activities on reduction or addition in the cost of that manufacturing process. For example a manufacturing unit is producing certain products but due to lack of equipment the production line has to wait for certain time. In this case the equipment can be termed as cost driver and manager can calculate the cost of that activity on the biases of presence and absence of that equipment.
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