What is an Activity Base?

An activity base is a measured activity that is used to allocate overhead costs. An activity base should be used when there is a direct causal relationship between it and the overhead costs being incurred. A more complex allocation system might employ several activity bases.

Example of an Activity Base

Here are several examples of activity bases:

Machine hours. This is the total hours that machines are running in a factory or production facility. It is often used in manufacturing to allocate machine maintenance costs, power costs, or other machine-related expenses to products.
Labor hours. This is the total hours worked by employees on a specific project or task. Labor hours can be an activity base for allocating wages, benefits, or other labor-related costs in sectors where labor is a significant cost driver.
Number of units produced. This is the total number of units of a product manufactured or processed. It can be used to allocate costs like packaging, quality control, or inspection expenses that vary directly with the number of units produced.
Number of orders processed. This is the total number of customer orders or purchase orders handled. It can be used to allocate costs of processing orders, such as administrative overhead, packing, and shipping expenses.
Square footage. This is the total area occupied by different departments, machines, or employees. It is often used in real estate or facilities management to allocate building rent, utilities, or cleaning costs based on the space each department occupies.
Number of batches. This is the total number of production batches processed within a specific period. It is useful in industries where costs vary with batch processing (e.g., batch-based cleaning costs or setup costs).
Number of setups. This is the total number of equipment or production setups required. It is useful for allocating setup costs, especially in manufacturing where different products or jobs may require unique setups.
Number of inspections. This is the total number of quality control checks or tests performed. It can help allocate quality assurance costs across products, especially where different products require different levels of inspection.
Direct labor cost. This is the total direct labor cost incurred on a product or service. It is often used in industries where labor cost is directly tied to production, allowing overheads to be allocated relative to direct labor costs.

Each of these activity bases helps businesses better understand their cost drivers, enabling more accurate allocation of overhead and indirect costs and potentially leading to more effective pricing and operational efficiency.

Activity Base Best Practices

Whenever possible, use activity bases for which information is already being accumulated by the accounting system. By doing so, you are avoiding the incurrence of any additional costs. This is an especially good idea when there is already an activity base being tracked for which a reasonable causal relationship with the targeted overhead costs already exists.