Activity Driver:
Noun
1. In cost accounting, an activity driver refers to a factor that influences the cost of a particular activity within a business process. It is a measure or metric used to allocate costs to different cost objects, such as products, services, or departments.
2. In performance management, an activity driver is a key indicator or variable that directly affects the performance or outcome of a specific activity or process. It helps in identifying and measuring the factors that contribute to the success or failure of an activity, enabling organisations to make informed decisions and take appropriate actions to improve performance.
Overall, an activity driver serves as a tool for cost allocation and performance measurement, providing valuable insights into the relationship between activities and costs or outcomes within an organisation.
An activity driver is a term used in cost accounting to refer to the factor that drives the cost of a particular activity. It is used to allocate overhead costs to products, services, or other cost objects based on the level of activity that drives those costs. Activity drivers can include factors such as machine hours, labor hours, or number of units produced. The use of activity drivers is important in accurately determining the cost of products and services and in making informed business decisions.
Q: What is an activity driver?
A: An activity driver is a factor that influences the cost or duration of an activity. It is used in activity-based costing to allocate costs to products or services based on the activities required to produce them.
Q: Why is activity driver important?
A: Activity drivers help in accurately assigning costs to products or services by linking them to the activities that consume resources. This allows for better cost management and decision-making.
Q: How do you determine the activity driver for an activity?
A: The activity driver for an activity is determined by identifying the factor that has the most significant impact on the consumption of resources or the duration of the activity. This can be done through observation, analysis, or historical data.
Q: Can an activity have multiple activity drivers?
A: Yes, it is possible for an activity to have multiple activity drivers. Different factors may influence the cost or duration of an activity, and it is important to consider all relevant drivers for accurate cost allocation.
Q: What are some common examples of activity drivers?
A: Common examples of activity drivers include machine hours, labor hours, number of setups, number of orders processed, miles driven, or units produced. The choice of activity driver depends on the nature of the activity and the resources consumed.
Q: How do you calculate the cost allocation using activity drivers?
A: To calculate cost allocation using activity drivers, you need to determine the total cost of the activity and divide it by the total activity driver quantity. This will give you the cost per unit of activity driver, which can then be multiplied by the actual activity driver quantity for each product or service to allocate costs.
Q: Can activity drivers change over time?
A: Yes, activity drivers can change over time. As processes, technologies, or business conditions evolve, the factors influencing the cost or duration of an activity may also change. It is important to regularly review and update activity drivers to ensure accurate cost allocation.
Q: What are the benefits of using activity drivers?
A: Using activity drivers in cost allocation provides several benefits, including more accurate cost information, better understanding of cost drivers, improved decision-making, identification of cost reduction opportunities, and enhanced cost control.
Q: Are activity drivers only used in manufacturing industries?
A: No, activity drivers are not limited to manufacturing industries. They can be used in any industry or sector where activities consume resources and costs need to be allocated. Activity-based costing is applicable in service industries, healthcare, government organisations
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This glossary post was last updated: 29th March 2024.
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