Final answer:
A cost driver is the cause of an activity cost. It is a factor that incurs cost based on its level of activity. Cost drivers are crucial for managing business costs and making informed decisions.
Step-by-step explanation:
The cause of an activity cost is called a cost driver. In business and accounting, a cost driver is a factor that incurs costs based on the level of activity related to it. For instance, for every input such as labor, there is an associated factor payment like wages and salaries. The cost of production for a given quantity of output is therefore the sum of the total inputs needed to produce that output, multiplied by the respective factor payments. Understanding cost drivers is crucial in the management of business costs and can influence decision-making processes, such as conducting a cost-benefit analysis to understand the implications on profitability.