A cost driver represents anything that changes the cost of an activity, most likely an activity associated with manufacturing goods. Cost driver analysis is a review of these items to ensure the company accurately allocates production costs to goods and services. Different methods for this analysis include a cost accounting system review, internal activity analysis, and an industry analysis. Managerial accountants are the individuals primarily responsible for cost driver analysis. These individuals can also make recommendations for instituting new or better cost drivers for the cost allocation process.
Cost accounting systems is the process by which a company captures cost information and places it into allocation pools. This analysis is necessary because a company must ensure it uses the correct cost accounting system for its production method. For example, batches of specific goods – such as blouses for women – probably require a job order cost system. Managerial accountants gather costs for each batch of blouses run through the system. Cost drivers must be able to gather the requisite data for cost allocation.
Cost driver analysis is also an internal activity. For example, managerial accountants often review each activity in the production process. They will list all current cost drivers and assess the ability to accurately allocate costs to each good or batch of goods produced. Recommendations for new cost drivers may be necessary if a company has changed its production method. The results of the analysis then dictate which new driver will best fit the company’s internal production system.
An external review process is also a possibility under cost driver analysis. Many companies in a particular industry probably use a similar cost accounting system. The cost drivers used by competitors may be better to use for the company than its own selected cost drivers. Companies must be careful here, however, as production processes can vary widely between multiple businesses. Managerial accountants will probably conduct a review to determine if a new cost driver based on industry analysis will work for the company’s production system.
In each method, managerial accountants should ask a few questions when conducting cost driver analysis. The answers found should involve the identification of key activities, why the company needs to change cost drivers, what is involved in each activity, and what the resulting change will be. Answers often need to go to operational managers and executives. These individuals will most likely be responsible for signing off on cost driver changes. Starting out slow and then making all the changes is often the process for changing cost drivers.