Cost Drivers
The expense or overhead items most responsible for making a business competitive. Typically, cost drivers represent one or two expense line items out of perhaps 20 or more. For example, cost of raw material would be a key cost driver for an electric utility. Labor costs are the cost driver for most banks. Capital equipment the cost driver for a chemical or plastics manufacturing plant. While capital equipment exists as an expense item for all three industries, it represents the most critical one for companies in the chemical business. The intelligence lesson for the analyst is: focus your analytical time on the key cost drivers; they can make or break a business. Often, analysts will waste a considerable amount of time chasing other areas of cost that have little impact on the overall business. For more details, see Fuld & Company seminar series.
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