Understanding drivers helps set prices that cover true costs and reveals which customers, products, or regions are actually profitable.
Relying solely on "piece" drivers can lead to .
: Machine setup frequency, quality inspection rates, and material waste.
If a factory produces two products—Product A (high volume, simple) and Product B (low volume, complex)—using a simple "piece" driver to allocate overhead (like machine setup costs) will make Product A look too expensive and Product B too cheap.
A cost driver is any variable that has a direct cause-and-effect relationship with total costs. Common examples include:
A "piece" cost driver is a used to allocate costs based on the number of individual units (pieces) produced.
Once you know what drives costs, you can manage the driver. If machine setups are a major cost driver, reducing setup time or batch size can lower total costs.
Understanding drivers helps set prices that cover true costs and reveals which customers, products, or regions are actually profitable.
Relying solely on "piece" drivers can lead to .
: Machine setup frequency, quality inspection rates, and material waste.
If a factory produces two products—Product A (high volume, simple) and Product B (low volume, complex)—using a simple "piece" driver to allocate overhead (like machine setup costs) will make Product A look too expensive and Product B too cheap.
A cost driver is any variable that has a direct cause-and-effect relationship with total costs. Common examples include:
A "piece" cost driver is a used to allocate costs based on the number of individual units (pieces) produced.
Once you know what drives costs, you can manage the driver. If machine setups are a major cost driver, reducing setup time or batch size can lower total costs.
