Cost Driver Analysis Example File

| Activity Driver | Standard Chairs | Custom Tables | Total | |----------------|----------------|---------------|-------| | Machine hours | 40,000 | 10,000 | 50,000 | | Number of setups | 200 | 1,000 | 1,200 | | Number of inspections | 500 | 2,000 | 2,500 | | Number of moves | 5,000 | 10,000 | 15,000 |

These costs are traced directly using actual resource consumption records (e.g., maintenance logs, payroll records for setup workers, move tickets). We now select drivers that link each activity’s cost to the two product lines. cost driver analysis example

| Product | Traditional Overhead | ABC Overhead | Difference | |---------|---------------------|--------------|------------| | Standard chairs | 80,000 × $24 = $1,920,000 | $1,100,000 | Overcosted by $820,000 | | Custom tables | 20,000 × $24 = $480,000 | $1,300,000 | Undercosted by $820,000 | | Activity Driver | Standard Chairs | Custom

| Activity | Resource Cost Driver | Total Annual Cost | |----------|----------------------|-------------------| | Machine operation | Machine hours | $1,000,000 | | Setup | Setup hours | $600,000 | | Quality inspection | Inspection hours | $500,000 | | Material handling | Number of material moves | $300,000 | | | | $2,400,000 | It enables organizations to identify the underlying factors

| Activity | Description | |----------|-------------| | Machine operation | Running saws, planers, CNC routers | | Setup | Preparing machines for different products | | Quality inspection | Checking dimensions and finish | | Material handling | Moving lumber and parts to workstations | For each activity, we determine what causes resource consumption:

Abstract Cost driver analysis is a cornerstone of activity-based costing (ABC) and strategic cost management. It enables organizations to identify the underlying factors that cause costs to change, thereby improving budgeting, pricing, and process improvement decisions. This paper defines cost drivers, distinguishes between resource cost drivers and activity cost drivers, and presents a step-by-step example of cost driver analysis in a mid-sized furniture manufacturing company, Heritage Woodworks Ltd. The example illustrates how identifying the correct cost drivers—such as machine hours, number of setups, or square meters of material handled—can reveal hidden cost structures and lead to actionable managerial insights. 1. Introduction In traditional cost accounting, overhead costs are often allocated using a single volume-based metric, such as direct labor hours or machine hours. However, as organizations grow more complex and product lines diversify, such simplistic allocations can distort product costs. Cost driver analysis addresses this limitation by tracing costs to the activities that generate them.