You are the manager at Simply Yoga. In an effort to figure out how many classes you should put on the schedule and how many students should be in each class, you are wondering what things to look at. Labor, number of classes taught or number of participants could all be cost drivers. Well, direct labor is going to be a driver for you, since you currently pay per student, but have a minimum amount of $84 per class. Let’s assume you teach heated classes. If you teach 20 classes, the rooms only need to be heated for those hours, but if you teach 50 classes, your hours of needing heat in the building has gone up considerably, causing an increase in utility costs! Which driver is most important in this example?

So for our example, Simply Yoga, we only assumed that one thing would change the budget: The number of classes taken. Some of the costs of the yoga studio may depend on other factors, like, how many hours the studio is open?

A cost driver is defined as the unit of activity that causes a change in the activity’s cost. In our Simply Yoga example, we first just looked at the number of students through the door as a cost driver. But, then we also need to look at how many classes are taught and how that may affect wages and other costs.

This additional cost driver may affect utilities, as if we need to have the heat at a certain temperature for classes, this cost may not depend on how many students take classes.

Let’s say we had 20 classes with 25 students each, so the studio was heated for 20 hours. What if we had 50 classes with 10 students each? The studio would then need to be heated for 50 hours! This could have a huge effect on our electricity bill, even though we have the same number of students through the space!

Another thing that could be an additional cost driver, may be wages. At Simply Yoga, the instructors are paid $7 per student, as we figured out when we were working on our budget. But what if they were guaranteed $84 per class, and paid $7 over this amount? Then we could have a huge fluctuation, depending on the number of students in each class.

Do you see how just looking at costs based on the number of classes taken, might not give you the true picture?

Let’s look closer:

If Simply Yoga still has 500 students come through their doors, but offers 50 classes instead of 20 and pays each instructor a minimum of $84 per class with $7 for each additional student, look how that affects the net income?

When multiple cost drivers are present, we need to look at each one to determine our net operating income. Determining the most important cost driver, is crucial as a component of budgeting. As we can see from this example, a change in the number of students through the door may have an effect, but the number of classes offered, and how many students participate in each one will also come into play.

Contribute!

Improve this pageLearn More