Cost Driver Analysis Example ((full)) May 2026

| Activity Driver | Standard Chairs | Custom Tables | Total | |----------------|----------------|---------------|-------| | Machine hours | 40,000 | 10,000 | 50,000 | | Number of setups | 200 | 1,000 | 1,200 | | Number of inspections | 500 | 2,000 | 2,500 | | Number of moves | 5,000 | 10,000 | 15,000 |

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

= $300,000 / 15,000 moves = $20 per move Step 5: Trace Costs to Products Using Actual Driver Consumption Now we collect data on how many driver units each product line consumes annually. | Activity Driver | Standard Chairs | Custom

| 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 | The example illustrates how identifying the correct cost

| 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.

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

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.