A cost driver is a factor that causes a change in the cost of an activity or production process. In cost accounting, identifying cost drivers is essential for accurately assigning costs to products, services, or departments. By understanding what drives costs, businesses can better manage expenses, improve pricing strategies, and enhance overall efficiency.

Cost drivers can be volume-based, such as the number of units produced, labor hours, or machine hours. For example, in a manufacturing setting, the more products made, the more raw materials and labor are needed—these are volume-based drivers. However, they can also be activity-based, tied to more specific business operations. Activity-based cost drivers include the number of purchase orders processed, customer service calls handled, or quality inspections performed.

Recognizing cost drivers is a key part of Activity-Based Costing (ABC), which assigns overhead and indirect costs more precisely. Instead of spreading costs evenly, ABC uses cost drivers to allocate expenses based on actual usage of resources.

Effectively managing cost drivers allows businesses to identify inefficiencies, reduce unnecessary spending, and make informed operational decisions. In short, cost drivers are fundamental tools for linking operational activities to financial performance, supporting strategic planning and cost control.