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.
The textbook answer defines cost drivers as those factors that determine the overall cost of. As an example, in manufacturing the cost drivers may be processing time or number of steps to produce the product. In service, the cost drivers could be the actual ratio of billable to non-billable time.
Or it may simply be the actual compensation package cost for labor. The key is that this cost driver is used to allocate the general overhead and administration costs through Activity Based Costing (ABC Costing). But this article isn’t about the textbook answer; it’s about understanding what drives costs in the small business world. Sometimes it ends up being the textbook answer, but most often it is some common denominator with the company that prohibits greater profits. I’ll give you a simple real life example.
Ray’s Auto Repair Back in the 90’s I had a client named Ray. His wife ran the office of the auto repair shop. He had four bays and four mechanics and was open five days a week. At the end of each month they barely made enough money to survive. So he asked me why he’s not making more money. His labor rate matched the competition and he had plenty of work. After several years of going there and interacting with him and his wife it really wasn’t hard to figure out.
Film iso blu ray terbaru xxi. Sometimes the obvious is ignored. First, he didn’t have enough bays to process the volume of work necessary to generate enough gross profit to cover his general operating costs.
Why do you think Firestone and Goodyear facilities have no less than 10 bays? In addition they are open seven days a week. A common discussion issue with my visits related to the inability of the mechanics to get the work done quickly. It was always the same issue, lack of experience or training. Here in this small business, what drove the cost up as a percentage of revenue were these two cost drivers. This is what I mean by cost drivers in the real world of small business. To understand cost drivers I’m going to first explain the relationship of cost drivers to profit.
Next I’ll attempt to teach you how to evaluate your business and identify the cost drivers. Finally an economic lesson in controlling cost drivers to enhance profits is illustrated. So let’s begin. Contents • • • • Cost Drivers and the Impact on Profit The key to cost drivers is understanding their relationship to profitability.
Always look at cost drivers in the here and now and not in the ideal world. The reason for this is because as you determine the current cost driver and then control this cost driver, a new one will take over and you’ll have to begin the process all over again. Basically it is an ongoing never ending process for continuous improvement. You don’t need to do this every day, but it should be a part of an annual self-evaluation. Allow me to illustrate this relationship in a simple business operation. Suppose you owned a hot dog stand. What do you think drives down profit?
Notice I didn’t say what drives costs? This is because the term cost drivers is the industry term used but in reality it should be referred to as profit dampening or profit reducers. But I’ll stick to cost drivers because this is the universally accepted terminology. OK, back to the question, what drives down profit? For the novice businessman he’ll say it is the cost of food or maybe not enough revenue associated with the sale of the hot dog. Me, I would say weather!
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