Choose the Right Cost Drivers to Build Full Costs

2024/08/17

Jérôme Keller

Choose the Right Cost Drivers to Build Full Costs

Cost allocation is an essential aspect of financial management and business accounting. Cost drivers play a crucial role in this process by allowing indirect costs to be distributed fairly and accurately.

A cost driver is a factor or activity that causes a change in costs. In other words, it is an element that induces costs within a company's operations. Cost drivers are used in costing systems such as Activity-Based Costing (ABC) to allocate indirect costs more precisely.

This article explores the concept of cost drivers, how to choose them, and which actors contribute to these choices. It provides concrete examples in 20 sectors to illustrate their use.

How to Choose the Right Cost Drivers?

The choice of appropriate cost drivers depends on several criteria:

Representativeness: The driver is representative of the activity or product to which the cost is attributed. For example, the number of labor hours could be a good driver for production-related costs.
Measurability: It is easy to measure and track. If a driver is too complex or costly to measure, it may not be useful.
Relevance: The driver has a direct relationship with the costs it is supposed to induce. For example, for travel expenses, the number of kilometers traveled would be a relevant driver.
Reliability: The data used for drivers are reliable and accurate to ensure fair cost allocation.

Key Actors in the Selection of Cost Drivers

The selection of cost drivers within an organization is a crucial task that requires the involvement of various key actors. Here is an overview of the collaborators who play an essential role in this process:

Key Actor	Role	Contribution
Management Controllers	Evaluate financial and operational performance	Use cost drivers to establish precise budgets and analyze variances
Chief Financial Officers (CFOs)	Oversee overall financial management	Decide on the main cost drivers to ensure strategic alignment
Production Managers	Manage production operations	Identify drivers related to labor, machines, and materials
Human Resources Managers	Manage personnel policies and practices	Choose drivers related to training, salaries, and benefits
Procurement Managers	Oversee the acquisition of goods and services	Select drivers based on material and logistics costs
Project Managers	Plan and execute projects	Identify drivers related to project time and resources used
Data Analysts	Collect and analyze data	Use cost drivers to provide detailed analyses and forecasts
Quality Managers	Ensure product and service compliance	Select drivers related to quality tests and non-conformance costs
Operations Directors	Oversee daily operations	Identify operational drivers to improve efficiency
Supply Chain Managers	Manage supply chain processes	Select drivers related to logistics, inventory, and transport

20 Activity Sectors and Their Cost Drivers

For a comprehensive understanding, here is a list of cost drivers for 20 different activity sectors. Each sector has unique specificities that justify different choices of cost drivers.

Sector	Specificities	Cost Drivers
Manufacturing Industry	The variability in raw material prices and production efficiency influence costs in this sector.	Number of labor hours Quantity of raw materials used Number of machines used Machine time Stock occupied area Number of finished products Quantity of waste produced Energy costs Equipment maintenance time Production volume
Health	The high costs of equipment and the need for highly qualified personnel are predominant in the health sector.	Number of patients treated Number of consultations Number of surgical interventions Bed occupancy time Quantity of medical equipment used Number of laboratory tests Number of prescriptions issued Medication costs Nursing care time Number of diagnostic procedures
Hospitality and Catering	Personnel costs and facility maintenance are essential to provide an optimal customer experience.	Number of rooms occupied Number of meals served Number of employees per shift Dining area used Quantity of kitchen supplies consumed Number of reservations Laundry costs Housekeeping time Quantity of food wasted Beverage costs
Retail	Effective stock and sales management is crucial to minimizing costs in the retail sector.	Number of transactions Sales area used Number of in-store employees Quantity of products sold Number of promotions conducted Storage costs Time to receive goods Number of customer returns Packaging costs Sales volume
Information Technology (IT)	Rapid innovation and development costs strongly influence expenditures in this sector.	Number of ongoing projects Number of lines of code written Server usage time Number of support tickets processed Quantity of data stored Software license costs Development time Number of tests conducted Employee training time Number of system outages
Logistics and Transport	Operational costs, particularly fuel and maintenance, are key factors.	Number of kilometers traveled Number of deliveries made Loading/unloading time Number of vehicles used Quantity of fuel consumed Vehicle maintenance costs Number of delivery delays Number of drivers employed Toll costs Volume of goods transported
Finance and Insurance	Risk management and regulatory compliance require continuous investments in this sector.	Number of policies sold Number of transactions processed Time to process requests Number of clients served Quantity of documents processed Subscription costs Number of claims Customer service costs Audit time Investment volume
Education	Investment in infrastructure and technology is essential to provide quality education.	Number of students enrolled Number of teaching hours Classroom area used Quantity of educational materials used Number of extracurricular activities organized Building maintenance costs Course preparation time Number of teacher trainings Textbook costs Volume of digital resources
Construction	The variability in material and labor costs greatly impacts projects in the construction sector.	Number of labor hours Quantity of materials used Equipment usage time Built area Number of ongoing projects Safety costs on site Planning time Quantity of construction waste Equipment rental costs Number of subcontractors
Marketing and Advertising	The success of marketing campaigns relies on effective resource and data management.	Number of campaigns launched Number of leads generated Time spent in campaign meetings Quantity of promotional material produced Number of distribution channels used Online advertising costs Content creation time Number of views/engagements Campaign tracking and analysis costs Traffic volume generated
Agriculture	Dependence on weather conditions and crop cycles influences costs in agriculture.	Cultivated area Quantity of seeds used Number of agricultural workers Volume of water consumed Pesticide and fertilizer costs Harvest time Quantity of products harvested Maintenance costs for agricultural machines Animal production volume Transport costs for agricultural products
Pharmaceutical Industry	R&D and regulatory compliance costs are determining factors in the pharmaceutical industry.	Number of research and development projects Quantity of raw materials used Number of clinical trials Medication production time Regulatory compliance costs Quantity of finished products Number of certifications obtained Distribution costs Marketing and promotion time Medication sales volume
Real Estate	Investments in infrastructure and regular maintenance are essential for property value.	Managed property area Number of rental contracts signed Building maintenance costs Number of renovations completed Insurance costs Negotiation time Real estate transaction volume Real estate advertising costs
Energy	Production and maintenance costs of energy infrastructures are determining factors.	Amount of energy produced Infrastructure maintenance costs Number of clients served Intervention time for outages Amount of fuels used Distribution costs Installation monitoring time Energy consumption volume Research and development costs Amount of waste generated
Tourism	Promotion and maintenance costs of tourist sites strongly influence this sector.	Number of visitors Number of services offered Average stay time Tourism promotion costs Number of partnerships with travel agencies Site maintenance costs Staff training time Online reservation volume Tourist transport costs Number of customer complaints
Media and Entertainment	Production and promotion costs require strategic management for project success.	Number of productions completed Amount of material used Filming time Post-production costs Number of views or audiences Distribution costs Promotion time Amount of content created Copyright costs Advertising revenue volume
Insurance	Risk management and regulatory compliance require continuous investments.	Number of insurance policies Claim processing time Reinsurance costs Amount of premiums collected Number of claims processed Marketing costs Agent training time Indemnity volume Audit and compliance costs Number of active clients
Legal Services	Costs related to legal research and consultations are crucial.	Number of clients represented Time spent on cases Legal research costs Amount of legal documents drafted Number of court appearances Continuous training costs Consultation time Number of cases closed File management costs Billing volume
Telecommunications	Continuous maintenance and development of infrastructures and services are essential.	Number of lines activated Incident resolution time Network infrastructure costs Amount of data transmitted Number of subscribers Equipment maintenance costs Service development time Number of new subscriptions Offer marketing costs Network traffic volume
Air Transport	Fuel and aircraft maintenance costs significantly influence operations.	Number of flights operated Layover time Fuel costs Number of passengers transported Aircraft maintenance costs Crew training time Number of baggage handled Onboard service costs Delay management time Ticket sales volume

Conclusion

Cost drivers are decisive tools for the precise allocation of indirect costs. By choosing the appropriate drivers, companies improve their financial accuracy and make more informed decisions. Understanding and correctly applying these drivers also helps to identify inefficiencies and subsequently optimize operational processes.