Cost drivers are the main factors that affect the cost of a product or service. These drivers can be divided into two categories: internal and external. Internal cost drivers are those that are related to the production process such as labor, materials, overhead, and machinery. External cost drivers are those that are related to the external environment and can include competition, customer demand, regulations, and availability of resources. Knowing what cost drivers are and how they affect the cost of products or services is an important part of any business.

Typical Cost Drivers Include:

1. Labor: Labor is one of the most important cost drivers and is often the largest component of a product or service’s cost. Labor costs include wages, benefits, and other labor-related costs such as training and recruitment. Labor costs can be affected by factors such as the availability of skilled workers, the cost of living in a particular area, and the availability of labor-saving technology.

2. Materials: Materials costs are the costs associated with the materials used in the production of a product or service. These costs include raw materials, parts, and components. Materials costs are affected by factors such as the availability of raw materials, the cost of transportation, and the cost of labor.

3. Overhead: Overhead costs are those costs that are not directly related to the production process but are necessary for the operation of the business. These costs include rent, utilities, insurance, taxes, and other indirect costs. Overhead costs are affected by factors such as the size of the business, the number of employees, and the cost of services.

4. Machinery: Machinery costs are those costs associated with the machines used in the production process. These costs include the purchase price of the machines, maintenance and repair costs, and the cost of fuel and electricity. Machinery costs are affected by factors such as the type of machines used, the availability of spare parts, and the cost of labor.

5. Competition: Competition is an important cost driver as it affects the prices of products or services. Competition can be in the form of other businesses offering similar products or services, or it can be in the form of substitute products or services. Competition can drive prices down, as businesses compete for customers, or it can drive prices up, as businesses try to differentiate their products or services.

6. Customer Demand: Customer demand is another important cost driver. Customer demand can be affected by factors such as the availability of products or services, the cost of similar products or services, and customer preferences. Customer demand can drive prices up or down depending on the availability of products or services and the cost of similar products or services in the market.

7. Regulations: Regulations are another important cost driver. Regulations can include local, state, and federal laws, as well as industry standards and codes of conduct. Regulations can affect the cost of a product or service by making it more difficult or expensive to produce or by increasing the cost of compliance.

8. Availability of Resources: Availability of resources is another important cost driver. Resources can include materials, machinery, and labor. Availability of resources can affect the cost of a product or service by making it more difficult or expensive to produce or by increasing the cost of compliance.

Conclusion

Typical cost drivers include labor, materials, overhead, machinery, competition, customer demand, regulations, and availability of resources. Knowing what cost drivers are and how they affect the cost of products or services is an important part of any business. By understanding the various cost drivers and their impact on the cost of a product or service, companies can develop strategies to reduce costs and improve their bottom line.