Cost drivers are elements that impact the final cost of a given activity. In terms of business, this can involve any factor that exerts an influence on the final cost of a good or service that is offered for sale. Here are some ways to go about determining the cost drivers that are relevant to producing your product.
Items you will need
- Inventory listing
- Price lists
- Wage scale information
- Accounts payable data
Evaluate the cost of raw materials used in the production of the good or service. Make note of whether or not economies of scale indicate that the raw materials are increasing in cost, thus raising the overall cost of producing each unit of your product.
Check on the quality of the machinery or equipment involved in producing your product. This would include taking into consideration how often repairs are required.
Take a long hard look at your production process. The idea here is to determine if there is any way to refine the process and thus increase productivity. With a little luck, you can identify a few steps in the process that can be tweaked to make it possible to produce more units per wage hour without adding any employees or new machinery.
Survey the location and setup of your production facility. Essentially, you want the machinery or equipment used in production to be arranged so manual transport between steps is minimized. This begins with the location where raw materials are stored and ends with the warehouse space that is set up to accommodate finished goods awaiting shipping.
Qualify your wages and benefits to your work force. Make sure your pay scale is competitive with similar firms in the area, and that you offer equitable benefits. Happy employees are productive employees, and thus help to keep the average production cost for each unit within reason.
The idea behind cost drivers is to be aware of what expenses go into manufacturing a final product. This awareness helps to make it possible to manage costs, thus helping the company to be more profitable.
Always evaluate the impact of a change in any cost driver on the other drivers in the chain. While the change may save time or money at one point in the process, it could create issues further along in production that minimize or even eliminate any savings gained by the change.