Cost Driver Analysis Example 'link' Jun 2026

In the world of business, costs don’t just "happen." They are triggered. Every expense a company incurs—from the electricity powering the lights to the raw materials feeding the production line—is the result of a specific activity or event.

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. cost driver analysis example

Instead of just looking at a total bill, cost driver analysis identifies the specific activities that cause a change in the cost of an operation. What is a Cost Driver? In the world of business, costs don’t just "happen

= $600,000 / 1,200 setups = $500 per setup = $600,000 / 1,200 setups = $500 per

| Activity | Resource Cost Driver | Total Annual Cost | |----------|----------------------|-------------------| | Machine operation | Machine hours | $1,000,000 | | Setup | Setup hours | $600,000 | | Quality inspection | Inspection hours | $500,000 | | Material handling | Number of material moves | $300,000 | | | | $2,400,000 |

In traditional cost accounting, overhead costs are often allocated using a single volume-based metric, such as direct labor hours or machine hours. However, as organizations grow more complex and product lines diversify, such simplistic allocations can distort product costs. Cost driver analysis addresses this limitation by tracing costs to the activities that generate them.

We perform cost driver analysis in five steps.