What is a Cost Driver?
Any action or component in an e-commerce business that triggers a change in costs incurred is called a cost driver. This concept is used to keep a company’s finances in order and Companies should aim to maintain a low-cost driver rate to increase profitability.
Significance of Cost Drivers in E-commerce
Every business runs on a cost-revenue basis. Elements triggering company costs can drive the business revenue to the peak. Here are some ways determining cost drivers in e-commerce helps:
- In scenarios like this, cost drivers can help the business determine how much the expenses of the project would be and how much money it will bring back in terms of profit.
- It helps businesses get a more accurate forecast of the true cost of the activity.
- Accounting for cost drivers also lets businesses determine the total production cost of a product.
- The cost driver concept is used to assign overhead costs to the number of manufactured units.
Prerequisites for Cost Drivers
Some prerequisites for cost drivers are as follows:
- Account-Based Costing (ABC) is a very popular accounting method in e-commerce. Usually, indirect and overhead costs like utilities and salaries are assigned to a product or a service. Cost drivers are an important part of ABC, and they can give the company a fair idea about the costs of a product so they can come up with a pricing strategy to bring profit.
Use Case With Cost Driver
To understand the cost driver, let us go through an example. The amount of electricity your company uses in a month determines your electricity bill. Here, electricity units are the cost drivers and the electricity bill is the cost. The higher the electricity units (cost driver) higher are the company’s electricity bill (cost).