Example | Cost Driver Analysis

A cost driver is the unit of an activity that causes the change of activity’s cost. In traditional accounting, we often blame "output volume" for everything. In modern management (specifically Activity-Based Costing), we realize it’s more nuanced.

Future budgets can be prepared using flexible budgets based on expected driver volumes. For example, if setups increase by 10%, setup costs should increase by $50,000 (10% × 1,200 × $500). Variances can be analyzed at the activity level. cost driver analysis example