Cost Drivers: How to Distribute Expenses and Optimize Profitability

In the business world, understanding how costs are generated and how to distribute them properly is key to making strategic decisions. This is where the cost drivers for expense distribution, also called cost drivers, essential to correctly assign the indirect costs to the products, services or customers that actually generate them.

What are cost drivers for expense distribution?

A cost driver is the factor that causes an activity to incur an expense. It is used as a criterion for distribute indirect costs in accounting in a fair and accurate manner.
Common examples include:

• Labor hours
• Machine hours
• Number of orders processed
• Kilometers traveled
• Number of inspections performed

Types of cost drivers

1. Transaction drivers: They are based on the number of times an activity occurs.
   Example: number of invoices issued or orders generated.
2. Drivers of duration or time: They measure the time required to carry out the activity.
   Example: consulting hours or machinery maintenance.
3. Intensity drivers: They consider the level of resource consumption by activity.
   Example: energy consumption per process.
4. Structural drivers: They are related to strategic decisions that impact long-term costs.
   Example: number of production lines or branches.

Practical example

Let's imagine a company of marketing services that needs to distribute the office rentals between:

• Creative Area
• Customer Management Area

If the driver chosen is the number of employees:

• Creative Area: 6 employees → 60% of the cost
• Customer Area: 4 employees → 40% of the cost

But if we use occupied square meters As a driver, the assignment may change and reflect a actual use of resources, allowing for more efficient decision-making.

Benefits of using cost drivers

• Assignment plus accurate and fair of indirect costs
• Identification of activities that generate higher expenses
• Improvement in the pricing and profitability
• Elderly control and optimization of resources

Contact us

If you want to implement a system of efficient cost distribution in your company and improve profitability, in CFO-Ready can advise you.
Write to us at hgalicia@taxid.mx or call us at +52 33 1023 5948 and discover how to take your business finances to the next level.