we explored specifics of health care finance, including cost drivers. in a discussion, define cost driver...

we explored specifics of health care finance, including cost drivers. in a discussion, define cost driver and explain the characteristics of a good driver as opposed to a poor one

Expert Solution

Cost drivers can simply be understood as that which drives the cost. A cost driver is a unit of an activity that drives or causes the costs for that activity. The concept of cost drivers is used when applying activity-based costing. For example, the number of customer orders is the cost driver for ordering costs, i.e, if the number of customer orders is high, then the ordering costs for the company will also be high and vice-versa. Thus, it can also be understood that cost drivers drive variable costs in most cases and they can have a direct or inverse relationship with the costs. Another example of an inverse relationship between activity costs and its cost driver is of numbers of inspections and rework costs. If the number of inspections is increased at the time of manufacturing then the costs of rework after defective manufacturing can be significantly reduced.

The characteristics of a good cost driver over a poor one are as follows:-

a good cost driver clearly displays the relationship between the driver and the costs whereas, a poor one will fail to do so
a good cost driver is at the base of causing or driving the costs whereas, a poor cost driver is not and there are indeed other factors which are affecting the costs
a good cost driver helps in identifying the reasons for increase or decrease in an activity's cost whereas, a poor one will not be able to explain the root cause of the analysis of costs for the given activity as it does not directly affect the activity or its cost
a good cost driver can be used to control or reduce the cost while a poor one will not add value in any type of cost control or cost reduction.
identifying the real and appropriate cost drivers for any given activity helps in identifying all the cost drivers and making the activity leaner by removing all the non-value adding drivers

ekkarill92 answered 2 years ago

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