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and finance Allah shmoop What is a cost driver Old

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All right people to be ableto fix something you need

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to know what's wrong with it first right That's the

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point of a cost driver I'LL think about an actual

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driver You're on the highway and suddenly you hear a

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loud crunch from underneath the car The car skids to

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a halt smoke pouring out from under the hood Yeah

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well engines air complicated things The mechanic has to be

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able to identify what specific part broke so he can

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fix it Otherwise every time you hear a rattle well

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you have to ditch the entire engine and start over

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Well the term cost driver can get used a couple

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of different ways In one sense it refers to any

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expense that contributes to the production of a company's product

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Will cost drivers in this context or used to identify

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specific items in a production process that contribute to the

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expense of making that item Cost driver also gets used

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to refer to the main expenses a product or at

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least a handful of expenses that matter most well The

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goal is to identify the most significant contributors to the

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overall cost You own a cow candy bar factory to

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make the bars you've incurred a series of expenses Well

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there are the ingredients you know like a cow which

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makes chocolate You got sugar and milk and nuts and

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caramel You've also got the labor like the people actually

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working the industrial mixing vat or driving stuff around on

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forklifts And you've got things like kill the energy needed

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to run all the machinery and heat up all the

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sugar and chocolate and stuff and the cost of cleaning

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all the mixing equipment After your employees lick the excess

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you know gooey stuff off the mixing bowl thing Well

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each item the chocolate to sugar the nuts the labor

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the energy the cleaning all count as cost drivers They're

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all drivers of the cost of making a candy bar

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But you Khun drill down further to find the expenses

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that really matter Like say that the sugar in that

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candy bar makes up forty percent of the cost of

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producing that candy bar Well that makes it the main

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cost driver for that product That candy bar Well the

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cost of the chocolate might go up but it doesn't

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really matter because well that Takao is only five percent

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of the total cost of that candy bar But if

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the cost of sugar goes up well that could really

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hurt the bottom line Well individual cost drivers can include

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many distinct categories of expenses Labor utilities transportation insurance raw

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materials advertising interest expenses complimentary raw oyster bar for the

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break room Any of these things can become cost drivers

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Well you Khun further categorise these cost drivers into what

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are called cost pool's think animals Cost drivers are like

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individual species Draft for Angela's and hammerhead sharks Cost pools

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are like the broader animal classes like mammals a racket

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IDs and fish So electricity water an Internet costs or

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connectivity costs are each potential cost drivers But you can

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also group them together in cost fools of utilities Identifying

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cost drivers allows companies to find ways to maximize profitability

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well back to the candy bar Since sugar makes up

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forty percent of the cost of these candy bars well

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if you can lower the cost of that sugar you

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could really increase profits You could change your recipe maybe

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to use less sugar and more chocolate which would lower

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your dependence on sugar Or you can replace sugar with

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a substitute like a sweetener You know one of your

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scientists cooked up in a lab if that sweetener is

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cheaper than sugar well maybe you've just significantly lowered your

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expenses but you only know to focus on lowering sugar

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costs because you did the work to find out that

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sugar was in fact your primary costs driver Will companies

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track expenses as closely as possible to give category separate

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in order to make these determinations like say you discover

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that the chocolate your employees have been licking off the

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equipment really leads to a big drop in inventory So

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you put in place a zero licking policy enforced by

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electrodes in the equipment They give a little discouraging shock

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when they come into contact with the human tongue Electrocution 00:03:56.56 --> [endTime] or no chocolate life is full of tough decisions

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