Activity Driver Analysis – Definition

Cite this article as:"Activity Driver Analysis – Definition," in The Business Professor, updated September 20, 2019, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/activity-driver-analysis-definition/.

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Activity Driver Analysis Definition

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.

A Little More on What is Activity Driver Analysis

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.

How Activity Driver Analysis Works

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:

Types of ActivitiesDirect Cost Drivers
Ordering and receiving items cost.The number of purchase orders made
Operating machine costThe number of hours used to operate a machine
Assembling of products costThe number of labor hours used to assemble the products
The cost of setting up a machineThe number of batches required to set up a machine
The cost of supervising and inspectingThe size of batches to be supervised

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.

Reference for “Activity Driver Analysis”

https://www.accountingtools.com/articles/2017/5/7/activity-driver-analysis

https://www.investopedia.com › Investing › Financial Analysis

https://www.mbaskool.com › Concepts › Finance and Economics

www.investorguide.com/definition/activity-driver-analysis.html

https://financial-dictionary.thefreedictionary.com/Activity+Driver+Analysis

www.businessdictionary.com/definition/activity-driver.html

Academic research on “Activity Driver Analysis”

Managing the long-term profit yield from market segments in a hotel environment: a case study on the implementation of customer profitability analysis, Noone, B., & Griffin, P. (1999). Managing the long-term profit yield from market segments in a hotel environment: a case study on the implementation of customer profitability analysis. International Journal of Hospitality Management, 18(2), 111-128. Customer profitability analysis (CPA) is a technique which assesses the profit yield from market segments, primarily to provide management with information that will enhance long-term yield decisions. This paper documents the findings of a study which was carried out in order to test the feasibility of implementing a customer profitability system in a hotel environment. The test site chosen for the implementation of the system was a three star, 90-bedroomed hotel property located in the centre of Dublin city. The time taken to conduct the study at the site was 13 months. In order to implement the customer profitability system a 10-step systems development cycle was designed as reported by Noone and Griffin (1998). The paper reports on the key implementation issues at each stage of the development cycle, focusing primarily on the application of activity based costing to assign costs to customer groups, including activity analysis, driver identification and software chosen. The results of the analysis both in terms of the customer profitability figures outputted by the system and also management’s evaluation of the system are presented. Among the findings of the analysis was that 38% of the revenue base at the site was generating a profit equivalent to 137% of total profits, with 30% of the revenue base generating a negative profit contribution equivalent to 62% of total profits. This finding is consistent with those reported by Cokins et al. (1993) illustrating that a small proportion of the customer base is generating more than 100% of the profits. Additionally, it was found that management at the site were unaware of the scale of the profit/loss generated by respective groups.

Value creation logics and the choice of management control systems, Sheehan, N. T., Vaidyanathan, G., & Kalagnanam, S. (2005). Value creation logics and the choice of management control systems. Qualitative Research in Accounting & Management, 2(1), 1-28. Most, if not all, management control tools were formulated for firms employing an industrial value creation logic (i.e., Ford, McDonald’s, and Wal‐Mart). We argue that given the growth, both in number and importance, of firms employing a knowledge value creation logic (i.e., Accenture, Goldman Sachs, and Clifford Chance) and firms employing a network logic (i.e., Verizon, eBay, and Expedia) that these control tools should be revisited in light of this potentially critical contingency. This paper outlines the key characteristics of knowledge intensive firms and network service firms and then examines how these contingencies impact Simons’ (1995) Levers of Control and Kaplan and Norton’s (1996) Balanced Scorecard. We find that whilst each lever/perspective is still relevant for each value creation logic, the relative importance and thus intensity of use should vary between logics.

Research on Activity Quality Costing, Wang, X. P., & Zhang, Q. (2012). Research on Activity Quality Costing. In Advanced Materials Research (Vol. 403, pp. 3322-3328). Trans Tech Publications. Quality costing is an important part of quality cost management. How to adjust quality and cost scientifically is the focus of attention. Firstly from the perspective of the activity, this paper analyzes limitations of current quality cost accountings, and proposes the idea of quality costing under activity-based-costing. At the same time, this article constructs the theoretical model of activity quality costing, and designs mathematical calculation model specifically for the quality costing on the basis of original activity-based costing mathematical calculation model. Finally the author gives operation steps of activity quality costing.

Management information system of activities-based quality-cost, Hou, Z. (2011, September). Management information system of activities-based quality-cost. In 2011 IEEE 18th International Conference on Industrial Engineering and Engineering Management (pp. 1031-1034). IEEE. Quality-cost management is one of the basic functions of quality management. With the rapid development and popularization of information technology, quality-cost management extends from product layer to operational level. From the view of process quality management, architecture of activities-based quality-cost management system was proposed, framework of activities-based quality-cost management was preliminary established, accounting principle, basic steps and characters of activities-based quality-cost management were analyzed, and the implementation scheme of activities-based quality-cost management was advanced.

Can ERP and informality achieve a trade-off between efficiency and flexibility?, Wang, Y., & Greasley, A. Can ERP and informality achieve a trade-off between efficiency and flexibility?.

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