5.3 Classification of cost drivers

In activity-based costing (ABC), cost drivers are used to determine the factors that cause activities to occur and drive costs within an organization. Cost drivers can vary depending on the nature of the activities and the specific context of the organization. Here are some common classifications of cost drivers in ABC:

1. Transaction drivers: These cost drivers are based on the number of transactions or events that occur. They capture the costs associated with processing transactions or activities, such as the number of purchase orders processed, invoices generated, or customer orders fulfilled.
2. Duration drivers: These cost drivers measure the time taken to perform an activity or process. They capture costs based on the length of time an activity consumes resources. Examples include machine hours, labor hours, or time spent on specific tasks.
3. Intensity drivers: These cost drivers capture the intensity or extent to which an activity is performed. They measure the level of effort or resources expended in carrying out an activity. Examples include the number of setups, number of inspections conducted, or the volume of materials used.
4. Structural drivers: These cost drivers reflect the underlying structure or complexity of an organization’s operations. They capture costs related to the organization’s size, complexity, or geographical reach. Examples include the number of product lines, number of locations, or the number of employees.
5. Output drivers: These cost drivers are based on the volume or output of products or services. They allocate costs based on the quantity or number of units produced, sold, or delivered. Examples include the number of units produced, sales revenue, or the number of customers served.
6. Complexity drivers: These cost drivers account for the complexity or diversity of products or services offered by an organization. They allocate costs based on the complexity of activities required to produce or deliver different products or services. Examples include the number of product variants, number of customization options, or the complexity of production processes.
   Some examples of cost pools and related cost drivers are as shown below.
   

Cost pool	Cost driver
Power Material handling   Material receipt  Production planning  Sales administration  Set up costs	Number of machine operations Quantity or weight of materials handled Number of batches of materials received Number of jobs or materials planned Number of customers or orders received Number of jobs run

Examples of some costs and their cost drivers are shown below

Activity	Possible cost driver
Car fuel cost  Materials handling  Production scheduling  Mailing costs	Number of kilometers Number of production runs Number of production runs Number of mails sent

Example of cost drivers

The following are examples of cost drivers in the manufacturing sector.

Activity	Cost driver
Material procurement  Material handling Quality control Engineering services Maintenance Line set-up	Number of purchase orders Number of movements Number of inspections Number of change orders Number of break downs Number of set-ups

For the service sector the following taken from the field of health care may serve as an example.

The cost drivers from the basis of costs charged to patients.

Activity	Cost driver
Patient movement Booking appointments Patients reception X-ray: Equipment preparation Patient preparation Patient aftercare Film processing Film reporting	Number of in-patients Number of patients Number of patients   Time taken Time taken Time taken Number of images Number of images