An activity is a business task, or an aggregation of closely related purposeful actions, with clear beginning and ending points, that consumes resources

and produces outputs. An activity could be a single task or a simple process. Resources are inputs, such as materials, labor, equipment, and other economic elements consumed by an activity in the production of an output. Outputs are
products, services, and accompanying information flowing from an activity. In seeking continuous business improvement, an overall examination of variations in performances of key organizational activities and their causes is referred to as activity analysis. Performance is measured by a financial or nonfinancial indicator that is causally related to the performance (adding value to a product or service) of an activity and can be used to manage and improve the performance of that activity.

The level of an activity within an organization depends on that level of operations supported by that activity. For instance, a unit-level activity is one that is performed directly on each unit of output of an organizational process. A batch-level activity is one performed on a small group, or batch, of output units at the same time.

For example, the setup activity to run a batch job in a production process and the associated cost for completing such a setup is a batch-level activity. A customer-sustaining activity supports an individual or a particular grouping of customers,

Such as mailings or customer service. A product sustaining activity supports an individual productor product line, such as product (re)design or (re)engineering. These last two types of activities are sometimes referred to as service-sustaining

Activities. Lastly, a facility-sustaining activity supports an entire facility, such as the actions of the manager of an entire plant, with an associated cost equal to the manager’s compensation package. Not every activity within an organization is

Significant enough to isolate in an activity analysis

ACTIVITY-BASED COSTING

Because costs are initially assigned from resource cost pools to activity cost pools and from there to final cost objects, activity-based costing is viewed as a two-stage allocation process. Once activities have been identified, an activity-based costing analysis can be completed. Activity-based costing is a form of cost refinement, designed to obtain greater accuracy than traditional allocations in cost assignments for product costing and decision- making purposes. Costs are assigned to activities

from resource cost pools. Costs are first accumulated according to the type of resource, such as materials or labor, with which they are associated. Then resource (cost) drivers, which measure the consumption of a resource by an activity, are identified and used to assign the costs of resource consumptions to each activity. The result of this assignment is an activity cost pool for each activity.

From the activity cost pool, the focus shifts to one or more activity drivers. An activity driver measures the frequency or intensity with which a cost object requires the use of an activity, thereby relating the performance of an activity’s tasks to

the needs of one or more cost objects. A cost object is why activities are performed; it is a unit of product or service, an operating segment of the organization, or even another activity for which management desires an assignment of costs for unit costing or decision making purposes. The activity cost pools are then reassigned to the final cost objects according to the intensity with which each cost object used the respective activity drivers.

A cost driver is that factor that has the effect of changing the level of total cost for a cost object.

In general, four types of cost drivers can be identified: volume-based, activity-based, structural, and executional

Activity-based management focuses on activity-based cost drivers. In investigating and specifying cost drivers, many methods are used, such as cause-and-effect diagrams, cost simulations, and Pareto analysis.

Traditional cost assignment systems typically would assign directly to the cost objects the costs of those resource consumptions that can be economically traced directly to units of output requiring the resources. The remaining costs, referred to as indirect costs, would be accumulated into one or more cost pools, which would subsequently be allocated to the cost objects according to volume-related bases of allocation. When different products consume resources at rates that are not accurately reflected in their relative numbers (volumes), a traditional cost allocation approach will result in product cost cross-subsidization.

That is, a high-volume, relatively simple product will end up overcosted and subsidizing a subsequently undercosted, low-volume, relatively complex product, resulting in inaccurate unit costing and suboptimal product-line pricing decisions and performance evaluations. Activity based costing tries to take the non-uniformity of resource consumption across products into account in the assignment of costs.
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