Intermediate Cost Drivers

A term used in the analysis of productivity and economies of scale. An intermediate cost driver is an activity, such as an entry of an order, that adds value and contributes to the acquisition or retention of the customer and the unit volume he represents
(abbreviation: ICD).
(See also Economies of Scale
, Effectiveness, Efficiency
, Productivity

Intermediate Cost Drivers represent the various activities necessary to produce your goods and services (order processing, sales calls, assembly).

Efficiency is the units of input per activity (people hours per sale, cost of equipment per assembly).

Effectiveness is the number of activities per output (sales calls per order, assembly stages per product).

Example 1:

Shaw demonstrates a clear edge in sales, general and administrative costs (SG&A) in the carpet industry. Its SG&A costs are fully 3-4% less than Mohawk's, while its "reach" (number of outlets sold to per sales rep) took a strong upward turn in 1994. (Year 1994-SIC 2273)

Explanation: Shaw employed fewer units of Building Block Costs (sales reps) per Intermediate Cost Driver (retail outlets) than did Mohawk. Shaw's Efficiency was higher than Mohawk's in this function.

Example 2:

Procter & Gamble decided that some of its prices were too high for its basic products. P&G had the highest overhead in the business. It embarked on an aggressive cost reduction effort to reduce overhead. P&G's new management structure is three levels lighter. (Year 1994-SIC 2940)

Explanation: P&G reduced its management structure by three levels. It therefore reduced the people per Intermediate Cost Driver, increasing the Efficiency of the organization.

Example 3:

Anheuser-Busch and Miller dominate the relationships with the beer industry's largest wholesalers. Anheuser-Busch's effective distribution has helped it to achieve better profitability over the last few years. On the other hand, Heileman did not have many relationships with the large distributors. Although it was in the top five in the industry in terms of market share, it had predominantly smaller customers. For example, after its spate of acquisitions, Heileman was left with 2,400 distributors in 1983. Almost none of these wholesalers carried Heileman as their only brand. Given Heileman's sales in 1983 of 21 million barrels, the average company wholesaler would have sold under 9,000 barrels a year. This pales in comparison to the industry average in the same year of over 40,000 barrels. (Year 1983-SIC 2082)

Explanation: Anheuser-Busch had greater Effectiveness than did Heileman. Most aspects of cost, such as the cost of a visit, were cheaper per barrel sold for Anheuser-Busch than for Heileman. Anheuser-Busch had greater Effectiveness because it had fewer Intermediate Cost Drivers (salesmen visits) per unit of output (barrel) sold than did Heileman .

Example 4:

IBM substituted snap-on fasteners for screws and bolts, and combined multiple parts into one. Its new laser printer has fewer parts than Hewlett Packard's. Since they're so simple, the printers are cheaper and easier to make by hand than by robots. (Year 1990-SIC 3577)

Explanation: IBM reduced the number of Intermediate Cost Drivers per printer. This increased the Effectiveness of the manufacturing process by reducing the Intermediate Cost Drivers (parts and subassemblies) per unit of output (a printer).