Cost driver

Cost driver is an activity or factor whose change causes a cost to rise or fall, used as the allocation base when assigning overhead to products or as the independent variable in a cost prediction.

Also known asactivity driver

ByHoang TruongUpdated June 30, 2026

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A formula card states the cost-driver rate equation: Rate = Cost pool ÷ Driver units, where Rate is the charge per unit of the activity, Cost pool is all overhead attributable to that activity, and Driver units is the total activity planned in the period. In the worked example, set-up costs of €60,000 divided by 200 set-ups gives a rate of €300 per set-up; a product requiring 10 set-ups is therefore charged €3,000, regardless of the volume it produces. The formula stresses that the driver must have a genuine cause-and-effect link to the cost, not merely a statistical correlation.

Where it fits

SubjectCost AccountingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

AR = \frac{\text{Cost pool}}{\text{Total driver quantity}}

Variables

$A R$: activity rate (cost per driver unit) (€ per driver unit)
$C os tp oo l$: total indirect cost attributed to that activity (€)
$T o t a l d r i v er q u an t i t y$: budgeted total quantity of the activity driver across all products (driver units)

LaTeX

\text{Allocated overhead} = AR \times Q_{\text{actual}}

Variables

$A R$: activity rate (€ per driver unit)
$Q_{a} c t u a l$: actual driver quantity consumed by the product (driver units)

Check yourself

PracticeCORE

A factory's quality-inspection cost pool totals €40,000 per year. Management considers two possible drivers: machine-hours (8,000 budgeted hours) or number of inspections (500 budgeted inspections). Analysis shows that one inspection is triggered per production batch regardless of how long each batch runs. Which driver is more appropriate, and what is the resulting rate?

Select an answer to check your understanding.