COST DRIVER ANALYSIS

Ø  COST DRIVER ANALYSIS
ACCOUNTING FOR MANAGERIAL DECISIONS

vMEANING OF COST DRIVER CONCEPT

•     A COST DRIVER IS THE UNIT OF AN ACTIVITY THAT DRIVES THE CHANGES OF THE COST IN PRODUCING OR SERVICING. IT REFERS TO ANY ACTIVITY THAT CAUSES A COST TO BE INCURRED. IN TRADITIONAL  COSTING,THE COST DRIVER USED TO ALLOCATE OVERHEAD COSTS TO COST OBJECTS RELATES TO QUANTITY OF OUTPUT.

•     COST DRIVERS  ARE USED TO DESCRIBE THE EVENTS OR FORCES THAT ARE THE SIGNIFICANT DETERMINANTS OF THE COST ACTIVITIES FOR EXAMPLE PRODUCTION SCHEDULING COSTS GENERATED BY THE NUMBER OF PRODUCTION RUNS THAT EACH PRODUCTION GENERATES.

v      MAIN ACTIVITIES AND ITS COST DRIVERS

ü CUTOMER ORDER PROCESSING : THE COST DRIVERS COULD BE ORDER VALUE,ORDER SOURCE(NEW ,OLD),ORDER SOURCE (LOCATION)

ü MATERIAL PLANNING THE COST DRIVER COULD BE NUMBER OF MATERIAL TRANSACTIONS,VOLUME OF MATERIAL RECEIPT,VOLUME OF MATERIAL ORDERS

ü PRODUCTION CONTROL: ENGINEERING CHANGES,SUPPLIES PERFORMANCE,NUMBER OF PARTS,MAKE VERSUS BUY POLICY

ü MAINTENANCE OF MACHINES BREAKDOWN,MAINTENANCE SCHEDULES,CAPITAL EXPENDITURE,ACTIVITY LEVEL

ü MATERIAL HANDLING: NUMBER OF PARTS

ü QUALITY TESTING: HOURS OF TEST TIME

                                                                  

vMANAGEMENT OF COST

•     COSTS ARE INCURRED AT THE TIME OF ACTUAL PRODUCTION AND DELIVERY. NO SIGNIFICANT COST REDUCTION CAN BE ACHIEVED AT THE TIME WHEN THE COST ARE INCURRED. COST CAN BE MANAGED AT THE POINT OF COMMITMENT.

•     COST DRIVERS ARE THE FACTORS THAT DRIVE CONSUMPTION OF RESOURCES. MGMT OF COST DRIVERS IS ESSENTIAL TO MANAGE THE COSTS.

•     STRUCTURAL COST DRIVERS: ARE THE SCALE OF OPERATION,COMPLEXITY,TECHNOLOGY AND EXPERIENCE. IT ARISE FROM THE MODEL ADOPTED BY THE ORGANIZATION

•     EXECUTIONAL COST DRIVERS CAN BE MANGED BY EXECUTIVE DECISIONS LIKE CAPACITY UTILIZATION,PLANT LAYOUT EFFICIENCY,PRODUCT CONFIGURATION AND LINKAGE WITH THE SUPPLIES AND CUSTOMERS.

•     COST DRIVERS CAN BE MANAGED ONLY AT THE STRUCTURAL AND OPERATING ACTIVITIES WHICH CONSUME RESOURCES TO VARIOUS ACTIVITIES.

vCRITERIA FOR SELECTING COST DRIVERS

1.     EASY IDENTIFICATION,USE AND UNDERSTANDING

2.     THE EXISTENCE OF DIRECT REALTIONSHIP BETWEEN DIRECT AND INDIRECT COST:-

a)    DEGREE OF COMPLEXITY,DIVERSITY AND VARIATION OF THE PRODUCT

b)    ACCURACY OF CALCULATION

c)    DEGREE OF USEFULNESS OF INFORMATION

vTYPOLOGY OF COST DRIVERS

1.     THE RESOURCE LEVEL: CONSUMPTION OF WORK ACTIVITIES( SALARIES,CONSUMABES)

2.     ACTIVITY DRIVERS:-SPECIFIC UNITS REFLECTING ACTIVITIES CONSUMED BY OUTPUT

3.     COST OBJECT DRIVERS: CALCULATION OF OTHER COST OBJECTS

LEVEL 1:-ALLOCATING RESOURCES TO ACTIVITIES

LEVEL 11:-ACTIVITY TO COST OBJECT

LEVEL 3: COST OBJECTS TO FINAL COST OBJECT

•     COST DRIVERS ANALYSIS MERIT

1.     IMPROVING ENTERPRISE INFORMATION

2.     IMPROVING EMPLOYEE AND MANAGERS AWARENESS

3.     PERIODICALLY REVIEWING COSTS

4.     CONTROLLING COST

5.     ELIMINATING COST

6.     ACCURATE ALLOCATION TO INDIVIDUAL PRODUCTS