Activity base refers to a method of allocating costs or resources based on the level of activities or specific drivers that are associated with those costs. It is a fundamental concept used in activity-based costing (ABC) or activity-based management (ABM) systems, which aim to provide a more accurate representation of the costs associated with different activities in an organization.
In an activity base approach, costs are assigned to various activities based on the specific factors that influence the costs, such as time spent on an activity, number of units produced, or machine hours used. Activity base analyses the activities performed within the organization and identifies the key drivers that affect the costs associated with each activity.
By identifying and allocating costs based on the activity base, organizations can gain a better understanding of the true cost of their products, services, or processes. This information then becomes useful for decision-making, such as pricing strategies, cost control initiatives, and resource allocation.
For example, in a manufacturing company, the activity base can be measured by the number of machine hours used for each product. By allocating overhead costs based on the machine hours consumed by each product, the organization can accurately determine the cost of producing each item.
Overall, activity base provides a more accurate means of allocating costs, allowing organizations to make informed decisions to optimize their resources and improve overall efficiency.
