Cost Driver Analysis Example -

| Activity | Activity Cost Driver | Total Driver Quantity (Annual) | |----------|----------------------|-------------------------------| | Machine operation | Machine hours | 50,000 hours | | Setup | Number of setups | 1,200 setups | | Quality inspection | Number of inspections | 2,500 inspections | | Material handling | Number of material moves | 15,000 moves |

Without this analysis, TechBoard might have continued underpricing Product B. By understanding that "Number of Batches" is a major cost driver, they can now raise the price for custom orders or charge a setup fee to cover the inspection costs.

Now we collect data on how many driver units each product line consumes annually. cost driver analysis example

We now select drivers that link each activity’s cost to the two product lines.

Cost driver analysis moves you from "How much did we spend?" to "What action caused this spend?" Once you identify the trigger, you can optimize the process, price your products more accurately, and eliminate waste. | Activity | Activity Cost Driver | Total

If you don't know your drivers, you might cut the wrong things.

Product B (the Custom Board) is much more expensive to produce than the company realized. While Product B is only 9% of the unit volume, it drives 66% of the quality inspection costs. We now select drivers that link each activity’s

In this article, we will break down the concept of cost drivers and walk through a detailed, real-world example of how to perform an analysis to make better financial decisions.

Cost driver analysis transforms overhead from a black box into a manageable set of causal relationships. The Heritage Woodworks example demonstrates how identifying resource and activity cost drivers—such as machine hours, setups, inspections, and moves—can uncover substantial cost distortions. By moving from a single volume-based driver to multiple activity drivers, managers gain the insight needed to improve pricing, streamline processes, and enhance profitability. While implementation requires effort, the strategic benefits far outweigh the costs in most complex production environments.