Cost Drivers Examples In Service Industry
A cost driver triggers a change in the of an activity. The concept is most commonly used to assign costs to the number of produced units. It can also be used in analysis to determine the causes of overhead, which can be used to minimize overhead costs.
Examples of cost drivers are as follows: • hours worked • Number of customer contacts • Number of issued • Number of machine hours used • Number of product returns from customers If a business is only concerned with following the minimum accounting requirements to allocate overhead to produced goods, then just a single cost driver will be used. Related Courses.
Revenue, per se, is an extremely important line item in modeling. Many analysts, in the absence of relevant and required information about the cost drivers, typically use revenue line item to project the cost line items (costs expressed as a%age of sales / revenue / turnover). A rigor in revenue build up also ensures a rigor in costs projections. Oct 24, 2017 Explaining Activity-Based Costing in Context. This article further defines, describes, and illustrates activity-based costing using example calculations to contrast ABC with traditional cost accounting. Examples appear in context with related terms from the fields of budgeting, cost accounting, and financial accounting.
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A concern, which I come across in almost every financial modeling exercise leading to valuation, is how to estimate the revenue drivers of the company I am modeling for. This question is also raised every time I assign a company to my team of analysts and associates for modeling. In every classroom, I encounter similar concerns without fail. Industrialists and business owners emphasize that one needs to be an industry / business expert to identify the revenue drivers and then model them. I agree to such an opinion but only partly.
I vouch that one acquires the art of identification of appropriate revenue drivers by experience, but I am a very strong believer of the fact that most of it is common sense, once you broadly understand what a company does to earn revenue. For all the discussions in this article, let’s assume that we are undertaking a financial modeling exercise leading to valuation. The first line item that needs to be projected is “Revenue”.
Now ponder over the questions below: • Should “Revenue Build Up” be given a rigorous treatment? • Is “Revenue” a line item that needs special attention and rigor? • Why spend so much time on building up the revenue in a model hen it’s like any other line item in the entire exercise? “Revenue Build Up” exercise in a financial model should be rigorous and deserves utmost attention because: • Revenue Build Up typically will be the first piece to be modeled. This is the first module that your client, top management, seniors, reviewers, investors, lenders etc will go through before they move to the next section of your model. Rigorously projected revenue speaks a lot about the analytical skills, thought process, business understanding and industry understanding of a modeler. It gives the flavor of the rigor that rest of the model is expected to have.
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• Revenue, per se, is an extremely important line item in modeling. Many analysts, in the absence of relevant and required information about the cost drivers, typically use revenue line item to project the cost line items (costs expressed as a%age of sales / revenue / turnover). A rigor in revenue build up also ensures a rigor in costs projections. • In the absence of information about the capital expenditure plans and depreciation policy of the company, an analyst may again choose “Revenue” to project capital expenditure and depreciation in future years. And it’s not hidden how important capital expenditure as a line item is in the entire exercise of financial modeling leading to valuation.