Cost Drivers and Company Activities

Organizations require different types of supporting activities (administration, purchasing, marketing, logistics, etc.) to co-ordinate their products services. The accounting for different types of supporting overhead costs, as well as for material and labour costs, is important. Design and classification of cost drivers for accounting organizational and operational activities are usually the first cost accounting tasks to be handled.
Cost drivers
A cost driver is the unit of an activity that drives the change of cost in production 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.
There are usually two main types of supporting cost. The first is a resource driver, which is the contribution of the quantity of resources used to cost an activity, such as one kilogram of flour for bread production and one operator hour for manufacturing work. Examples of an overhead cost and resource cost driver are electricity costs and the number of machine hours. The second is an activity driver, which is the cost incurred by the activities required to complete a specific task. With changes in business structures, technology and related cost structures, output quantity are not the only cost driver. Examples of overhead costs and activity cost drivers are inspection costs and the number of inspections or the hours of inspection or production runs.
These have no direct relationship with production volume, but they directly affect production costs through the activity measured.
In general the cost driver for short-term overhead costs may be the volume of output or activity. For long-term overhead costs, the cost drivers will not be related to volume of output or activity. Further investigation of