cost drivers examples in service industry

Sometimes the obvious is ignored.įirst, he didn’t have enough bays to process the volume of work necessary to generate enough gross profit to cover his general operating costs. After several years of going there and interacting with him and his wife it really wasn’t hard to figure out. His labor rate matched the competition and he had plenty of work. He asked me why he’s not making more money. At the end of each month they barely made enough money to survive. He had four bays and four mechanics and was open five days a week. His wife ran the office of the auto repair shop. I’ll give you a simple real life example.īack in the 90’s I had a client named Ray.

Sometimes it ends up being the textbook answer, but most often it is some common denominator with the company that prohibits greater profits. The key is that this cost driver is used to allocate the general overhead and administration costs through Activity Based Costing (ABC Costing).īut this article isn’t about the textbook answer it’s about understanding what drives costs in the small business world. Or it may simply be the actual compensation package cost for labor. With service, the cost drivers could be the actual ratio of billable to non-billable time. As an example, in manufacturing the cost drivers may be processing time or number of steps to produce the product. The textbook answer defines cost drivers as those factors that determine the overall cost of operations.

Cost drivers examples in service industry