Unit Cost

and finance Allah shmoop What is a cost driver Old

All right people to be ableto fix something you need

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

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

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

loud crunch from underneath the car The car skids to

a halt smoke pouring out from under the hood Yeah

well engines air complicated things The mechanic has to be

able to identify what specific part broke so he can

fix it Otherwise every time you hear a rattle well

you have to ditch the entire engine and start over

Well the term cost driver can get used a couple

of different ways In one sense it refers to any

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

Will cost drivers in this context or used to identify

specific items in a production process that contribute to the

expense of making that item Cost driver also gets used

to refer to the main expenses a product or at

least a handful of expenses that matter most well The

goal is to identify the most significant contributors to the

overall cost You own a cow candy bar factory to

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

there are the ingredients you know like a cow which

makes chocolate You got sugar and milk and nuts and

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

working the industrial mixing vat or driving stuff around on

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

to run all the machinery and heat up all the

sugar and chocolate and stuff and the cost of cleaning

all the mixing equipment After your employees lick the excess

you know gooey stuff off the mixing bowl thing Well

each item the chocolate to sugar the nuts the labor

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

all drivers of the cost of making a candy bar

But you Khun drill down further to find the expenses

that really matter Like say that the sugar in that

candy bar makes up forty percent of the cost of

producing that candy bar Well that makes it the main

cost driver for that product That candy bar Well the

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

really matter because well that Takao is only five percent

of the total cost of that candy bar But if

the cost of sugar goes up well that could really

hurt the bottom line Well individual cost drivers can include

many distinct categories of expenses Labor utilities transportation insurance raw

materials advertising interest expenses complimentary raw oyster bar for the

break room Any of these things can become cost drivers

Well you Khun further categorise these cost drivers into what

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

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

are like the broader animal classes like mammals a racket

IDs and fish So electricity water an Internet costs or

connectivity costs are each potential cost drivers But you can

also group them together in cost fools of utilities Identifying

cost drivers allows companies to find ways to maximize profitability

well back to the candy bar Since sugar makes up

forty percent of the cost of these candy bars well

if you can lower the cost of that sugar you

could really increase profits You could change your recipe maybe

to use less sugar and more chocolate which would lower

your dependence on sugar Or you can replace sugar with

a substitute like a sweetener You know one of your

scientists cooked up in a lab if that sweetener is

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

expenses but you only know to focus on lowering sugar

costs because you did the work to find out that

sugar was in fact your primary costs driver Will companies

track expenses as closely as possible to give category separate

in order to make these determinations like say you discover

that the chocolate your employees have been licking off the

equipment really leads to a big drop in inventory So

you put in place a zero licking policy enforced by

electrodes in the equipment They give a little discouraging shock

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