Cost Drivers Examples In Service Industry

Revenue, per se, is an extremely important line item in modeling. Many analysts, in the absence of relevant and required information about the cost drivers, typically use revenue line item to project the cost line items (costs expressed as a%age of sales / revenue / turnover). A rigor in revenue build up also ensures a rigor in costs projections. Time estimates as cost drivers. Are used as duration drivers to allocate resource costs to activities and cost objects. As the service industry grows in. TRADITIONAL APPROACH TO OVERHEAD. The present cost accounting systems, used almost universally in the United States, were developed over half a century ago.

A factory has a machine that requires periodic maintenance. This maintenance incurs costs to be allocated to the products produced by the machinery. Therefore, the cost driver is identified and used as a base to distribute the costs. In this example, the cost driver selected is 'machinery hours.' It is determined that after every 1,000 machine hours, maintenance costing $500 is performed. Therefore, every machine hour results in an eventual 50 cents in maintenance costs that can be allocated to the product being manufactured based on the cost driver of machine hours.

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. Fanuc roboguide v640 rev e. 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. 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.

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