ACCA Performance Management (F5) Certification Practice Exam

What best defines a cost driver?

1. A fixed factor that does not influence costs

2. A factor that causes a change in the cost of an activity

3. A measurement of profitability

4. A type of expense report

The correct answer is: A factor that causes a change in the cost of an activity

A cost driver is best defined as a factor that causes a change in the cost of an activity. This concept is crucial in cost accounting and management because understanding cost drivers helps organizations identify and manage their costs effectively. For instance, if the level of production increases, it might lead to higher costs for materials and labor, making production volume a cost driver. Identifying these drivers enables businesses to analyze and control their costs, allocate resources more efficiently, and set appropriate pricing strategies. The other options do not accurately represent what a cost driver is. A fixed factor that does not influence costs would indicate something that has no impact on costs, which contradicts the very definition of a cost driver. A measurement of profitability relates to evaluating a company's financial performance, while a type of expense report is a documentation tool used to track and manage expenses but does not relate to how costs are influenced. Understanding cost drivers is essential for effective budgeting and decision-making, making the correct choice particularly relevant in performance management.