Cost-Drivers: Definition

A cost-driver is a factor that has an impact on the cost of a product or service. It may be a technical characteristic, a function or a location (examples: weight, length, region, type of surface, etc.).

A cost-driver may be a quantitative value or a qualitative value. To know if a factor is a cost-driver, the question to ask is, if for products with identical characteristics but different costs, this factor would allow to differentiate them significantly. If the answer is yes, the factor is a cost-driver.

If a factor is identified as a cost-driver but is difficult to access, it should be replaced with its consequence, if this consequence is easier to obtain. For example, if the number of impressions is more accessible than the projected area, the number of impressions can be used as cost-driver instead of the projected area.

To quickly identify the cost-drivers of a product, it is important to bring the costing, R&D and/or engineering people together with examples of parts or plans.

A Cost-Driver is:

  • A Technical Characteristic: the technical characteristics of a product are cost-drivers, like the weight, the length, the width, the diameter, etc.

  • A Function: a function of a product is a cost-driver. For example, the function “Screwdriver (yes/no)” of a drill has an impact on the cost of the product. For strictly identical characteristics, the fact of having a screwdriver function will result in having a higher cost.

  • A Country/Region: the country, the region, the city, etc., of production is a cost-driver. It inevitably influences the cost of the product.

  • A Supplier: the name of the supplier is a cost-driver. In fact, depending on the supplier, the same product will not have the same price.

  • A percentage: even if it is preferable to use a value, a factor representing a percentage can be used as cost-driver.

  • A month: the month can be a cost-driver, unlike a date. In fact, it can result in seasonality and therefore have a noticeable impact on the cost of the product.

A Cost-Driver is not:

  • A Time-Variable Factor: a time-variable factor is not a cost-driver. For example, the euro/dollar exchange rate cannot be a cost-driver because its value changes over time.

  • An Exchange Rate: the exchange rate is not a cost-driver. It is an indicator that varies over time and that will be used to adjust quotations, but not to estimate the cost of a product.

  • A Unique Identifier: a unique indicator, like a product identifier, is not a cost-driver. A cost-driver must at least include two separate values.

  • A Material Cost: the material cost is used to adjust quotations, but is not a cost-driver. Just as for the exchange rate, it is a time-variable factor.

  • A Date: the manufacturing date of a product is not a cost-driver. The date of a quotation is used for adjustment or as a filter.

  • An Incoterm: the incoterm is not a cost-driver but a value to be estimated.

  • A Currency: quotations must be in the same currency. The currency is not a cost-driver and cannot be used as a substitute for a conversion of the quotations.