activity

In activity-based costing systems, any operation performed within an organization that causes costs to be incurred. Examples of activities therefore include processing an order, writing a letter, designing a product, and visiting a customer. The number of activities identified as such will vary from organization to organization. Activity-based costing is founded on the recognition that resources generate costs, activities consume resources, and cost objects (products, services, or customers) consume activities.

For purposes of cost allocation, activities may be divided into several different categories:

• batch-level activities, i.e. those activities that are performed each time a batch of goods is handled or processed. The cost incurred depends on the number of batches run rather than on the number of units in the batch. The cost is not therefore dependent on the volume of units. See batch costing.

• product-sustaining-level activities, i.e. activities relating to specific products that must be carried out regardless of how many units are produced and sold.

• unit-level activities, i.e. activities that must be performed for each unit of production.

• customer-level activities, i.e. activities that are carried out for a customer but are not related to a specific product.

See also: facility-sustaining activity