Chapter 04: Budgeting & Cost Drivers

In this video, you will understand the cost drivers, its importance, implementation, Advantages & Disadvantages.

Budgeting & Cost Drivers are two important concepts in accounting and finance. Budgeting is the process of planning and allocating resources for a specific period of time, usually a year or a quarter.

Cost drivers are the factors that cause or influence the cost of a product, service, or activity. Cost drivers help determine the cost of producing a good or service and are used to allocate costs among different organizational units. They also help inform pricing strategies, budgeting decisions, and product design choices.

There are different types of cost drivers, i will discuss in upcoming videos, here you will understand the glimpse only such as volume-based, activity-based, structural, and executional.

Volume-based cost drivers are related to the number of units produced or sold, such as direct materials, direct labor, and machine hours.

Activity-based cost drivers are related to the number of activities performed to produce or sell a product or service, such as inspections, setups, and deliveries.

Structural cost drivers are related to the strategic choices of the organization, such as the size, complexity, and location of the operations.

Executional cost drivers are related to the efficiency and effectiveness of the operations, such as quality, productivity, and innovation12.

One method of budgeting that uses cost drivers is driver-based budgeting (DBB). DBB is a way of designing more accurate and effective budgets by linking them to the key factors that drive revenue and expenses. Rather than guessing how much to spend to reach revenue goals, DBB allows organizations to confidently say, “If we do X, we’ll earn Y,” and then develop a spending plan that allows them to invest in the things that move the needle (the revenue drivers). DBB helps organizations align their budgets with their strategic objectives, improve their forecasting accuracy, and optimize their resource allocation

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