Cost Driver Analysis Example

Future budgets can be prepared using flexible budgets based on expected driver volumes. For example, if setups increase by 10%, setup costs should increase by $50,000 (10% × 1,200 × $500). Variances can be analyzed at the activity level.

Under the old, traditional accounting system, TechBoard allocated overhead purely based on (Volume). cost driver analysis example

TechBoard produces two products:

TechBoard is facing a problem. Despite increasing sales volume, their profit margins are shrinking. Management suspects their overhead allocation is incorrect, but they don't know where the true costs lie. They decide to perform a Cost Driver Analysis on their . Future budgets can be prepared using flexible budgets

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. then assigned to cost objects (products

After interviewing shop floor supervisors and reviewing processes, four major overhead activities are identified:

In ABC, overhead costs are first assigned to activities using resource cost drivers, then assigned to cost objects (products, customers) using activity cost drivers. This two-stage allocation reduces cross-subsidization of costs.