A cost driver is the usage of resources that is driven by the activity. It is the component that has the best cause and effect relationship with the resources expended. An example of this would be the assembling of a product. The assembling uses direct labor if it is made by hand. The types of factors that make a certain cost driver the most accurate and applicable are the ones that the strongest relationship to the costs built up in the cost pool.
Work Step by Step
The drivers must accurately measure actual usage actions of an activity. A very high level of association between the driver and the usage is critical to having accurate overhead allocation measures.