Activity Cost Driver
Candlefocus EditorActivity Cost Drivers (ACD) are an important part of activity-based accounting (ABC). It is a method used to determine the expenses associated with business activities, by taking into account the indirect, variable costs.
Activity cost drivers can help businesses become more efficient, and ultimately, more profitable. Cost drivers can indicate when costs are more likely to increase, and when costs are likely to decrease. This helps businesses decide when to invest more in certain areas and when to back off spending. As a result, businesses can adjust competitively to changes in the business environment and maximize efficiency, thereby increasing overall profits.
For example, when a company is considering production of a new item, it will use the activity cost driver to determine the needed resources and labor costs. If, due to an increase in customer demand, the company senses that the variable costs of producing the new item will be too high, they can choose to increase production of an already existing item that generates higher returns.
Activity-based accounting’s activity cost driver system can also help business owners easily distribute costs between department, products and services and customers that are being targeted. By being able to accurately identify activity cost drivers, this system will help business owners to accurately adjust prices and cut costs on an ongoing basis.
Therefore, activity cost drivers are an important tool used in activity-based accounting. Cost drivers play a vital role in helping businesses become more efficient and ultimately more profitable. With the help of cost drivers, businesses can more accurately determine the true cost of activities and modify their operations to remain competitive.