What is an Activity Driver Analysis?

Activity cost driver analysis is a method used to assess and identify factors that influence the operation cost. This is usually a cost related to goods and services which forms part of activity-based costing (ABC). In other words, the activity driver analysis is applied in ABC to allocate and assess the drivers which affect the activity cost. Also, this methodology may be used in choosing activity drivers. These are activity drivers with the ability to contribute to the cost management function in reference to the reduction in cost.

How is an Activity Driver Analysis Used?

Activity driver analysis technique measures various activities attributes. The attributes usually represent measurable aspects such as the required amount of time to do an activity. It measures whether or not the activity adds value. It also measures the cost that is likely to be incurred when the activity is performed.

During the benchmark, the current activity performance and procedures are weighed and compared. The comparison is usually to the performance of similar activities in the organizations being benchmarked. In the organizations where benchmarking takes place, are usually known for their efficiency, and effectiveness in performing similar activities. However, it is important to note that one activity has no capacity to measure all the attributes. Note that activity driver analysis recognizes various factors that are activity related costs. It enables the management to assess those activity drivers that are efficient in terms of cost. Such activity drivers may include machines, materials, labor, and so on. Generally, when working with activity driver analysis, there must be an activity happening. If there is no occurrence of activity, then it means that there will be no cost to be incurred. Activity driver analysis happens when there is a variable directly influencing another variable. This is what creates a relationship of cause and effect. For instance, the number of sales calls made influences the total selling cost. Also, the number of purchase orders received is influences the orders total purchase processing cost.

Examples of Activity Driver Analysis

The following table represents an example of activities and their corresponding cost drivers:

Other Examples of Activity Driver Analysis

• The quantity (number) of supplier invoices process
• The number of hours used for training
• The number of square footage used
• The number of shipments made
• The number of warehouse picks made

Uses of Activity Driver Analysis

Activity driver analysis may be used to achieve the following:

• To determine whether or not there is a factual relationship between the activity drivers and cost of objects.
• To determine which activity drivers adds value to the business and which ones can be reduced so as to minimize activity related costs.
• To help keep track of the most consumed resources during activities performance. The resources here may include people, buildings, the machines among other resources.

Summary

Generally, there are no regulations and standards in any industry that stipulates the selection of a cost driver. The selection of cost drivers is dependent on the expenses variables incurred in the course of the production period.