All activities have one or more cost drivers that have direct cause and effect relationship to an activity. Cost drivers are either volume related like machine hours, labour hours or non-volume related such as set-up time, batch size, number of inspections etc. Activity driver analysis helps in identifying those cost drivers- root cause for an activity, which are easy to understand and measure and allocate costs to the activities based on the cost drivers.
Example: Below are some of the activities in a manufacturing plant and the corresponding cost drivers identified through activity driver analysis
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