What is Activity driver analysis?
Activity driver refers to an activity driver analysis that identifies and analyses the factors involved in the costing of goods and services as a part of activity-based costing. This system understands the relationship between costs, overhead activities, and manufactured products. Through this relationship, it establishes indirect costs. The ADA factors in the different sources through which cost is driven. Its analysis includes the relationships between activities and factors that drive the cost of such activities and ultimately provides management the tool to measure whether certain activities are more costly and whether certain drivers are easier to measure.
An activity cost driver in a cloth manufacturing business is the number of orders placed. Now every department, from sourcing the fabric to sewing to the finished product, has a set amount of orders that must be completed every day. If the amount of order changes, the cost of production would change too.
An increased number of orders would require the purchase of more fabric, additional workforce, and time required for assembly of the product. Thus one of the factors that drive cost is the number of units of a product being produced.
Why is it important?
An activity driver analysis allows the management to evaluate a company’s expenses. By pinpointing the exact source of different expenses, companies can analyze the unnecessary expenses and eliminate them. If one does not allocate cost to the factors driving activity, then the comparison between the costs of different products and services remains meaningless.
Activity cost drivers are also important in project costs. There are, however, no accounting standards for the exact calculation of cost drivers. They are only used as a tool by the management in order to understand which activities are causing certain expenses and arriving at the accurate cost of producing particular products or businesses. Cost drivers are always an estimate.
Accountants who evaluate cost drivers must possess a thorough understanding of the costs involved in the production of a particular good or service. Then they can determine an activity’s impact on the production of the product.
Average Payment Period (for materials)
Average Cost per Unit
Available to Sell (ATS)
Available to Promise (ATP)
Automated Storage-Retrieval System (AS-RS)
Automated Manifest System (AMS)
Automated Guiding Vehicle System (AGVS)
Automated Commercial Environment (ACE)
Automated Clearing House (ACH)
Automated Call Distribution
Automated Broker Interface (ABI)
Association of American Railroads
Approved Vendor List (AVL)
Any Quantity Rate (AQ)
Anticipated Delay Report
American Waterways Operators
American Trucking Association (ATA)
American Standard Code for Information Interchange
American Society of Transportation & Logistics
American Society for Training and Development (ASTD)
American Society for Testing and Materials (ASTM)
American Society for Quality (ASQ)
American National Standards Institute (ANSI)
American Customer Satisfaction Index (ACSI)
All Cargo Carrier
Airport and Airway Trust Fund
Airline Terminal Fee (ATF)
Air Transport Association of America
Air Cargo Containers
Aggregate Tender Rate
Aggregate Inventory Management
After Sale Service
Advanced Shipping Notice
Advanced Planning and Scheduling (APS)
Advance Material Request
Actual to Theoretical Cycle Time
Actual Cost System
Activity Network Diagram
Activity Based Planning (ABP)
Activity Based Management (ABM)
Activity Based Costing System
Activity Based Costing Model
Activity Based Costing (ABC)
Activity Based Budgeting (ABB)
Currency Adjustment Factor (CAF)
Cost, Insurance and Freight (CIF)
Cost and Freight (CFR)
Contract of Carriage
Container Yard (CY)
Completely Knocked Down (CKD)
Certificate of Origin (CO)
Carriage Paid To (CPT)
Carriage And Insurance Paid To (CIP)
Cargo Agents Settlement System (CASS)