Why activity cost driver matters to a first-time founder
An activity cost driver links the cost of work to the products, services or customers that require it. A sensible driver helps founders see why apparently similar sales use different amounts of time or money. This can improve pricing, processes and decisions about what to sell.
Examples of activity cost driver
A fulfilment team spends R180,000 a year processing 12,000 orders. The company uses the number of orders as the driver, so each order receives R15 of processing cost. A customer placing many small orders is then assigned more processing cost than one placing a few large orders.
Common misunderstanding
A cost driver is not just any number that is easy to count. It should closely reflect the time, money or other resources the activity uses. One driver can also be too simple: order-processing cost may depend on the number of items, returns or manual checks as well as the number of orders.
When to use it
Use activity cost drivers when assigning overhead costs or investigating why costs change. Start with activities large enough to affect decisions and data you can collect reliably. Review the link regularly because automation, product changes or customer behaviour can make an old driver misleading.