Cost Driver Analysis Example __hot__ May 2026

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

= $500,000 / 2,500 inspections = $200 per inspection

Abstract 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. 1. Introduction 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. cost driver analysis example

| Activity | Activity Cost Driver | Total Driver Quantity (Annual) | |----------|----------------------|-------------------------------| | Machine operation | Machine hours | 50,000 hours | | Setup | Number of setups | 1,200 setups | | Quality inspection | Number of inspections | 2,500 inspections | | Material handling | Number of material moves | 15,000 moves | We compute the rate per unit of activity cost driver.

| Product | Traditional Overhead | ABC Overhead | Difference | |---------|---------------------|--------------|------------| | Standard chairs | 80,000 × $24 = $1,920,000 | $1,100,000 | Overcosted by $820,000 | | Custom tables | 20,000 × $24 = $480,000 | $1,300,000 | Undercosted by $820,000 | = $600,000 / 1,200 setups = $500 per

These costs are traced directly using actual resource consumption records (e.g., maintenance logs, payroll records for setup workers, move tickets). We now select drivers that link each activity’s cost to the two product lines.

| Activity | Description | |----------|-------------| | Machine operation | Running saws, planers, CNC routers | | Setup | Preparing machines for different products | | Quality inspection | Checking dimensions and finish | | Material handling | Moving lumber and parts to workstations | For each activity, we determine what causes resource consumption: The example illustrates how identifying the correct cost

= $1,000,000 / 50,000 machine hours = $20 per machine hour