The word ‘activity’ will be used in this textbook as a general description to cover any physical operation that takes place in an enterprise. In a business providing bus transport for schoolchildren the activities will include driving the bus, cleaning the bus, making telephone calls to check routes and times, and ensuring that the administrative requirements, such as insurance and licenses, are in place.
In an NGO department providing assistance to elderly persons, the activities will include sending out home helps, paying the home helps, telephoning the clients to arrange visits and checking that spending is within the budget allowed.
In a product manufacturing business providing floor-cleaning machines the activities will include ordering parts, assembling parts, delivering the finished products to shops for sale, taking in returns for repair under warranty, paying employees and checking on the quality of the goods produced. These are all activities and they all cause costs to be incurred. The activities causing costs is central too much of the partition of costs and the collection of costs relating to a specific activity.
You can sometime find the phrase ‘activity-based costing’ has been created to recognize that management accounting is most effective when it links costs to the activities of the business.
Activities have to be measured. For the soft drink manufacturer the measure of activity is the number of cartons of soft drink sold. For the retail store it could be the number of items of garments sold, or it could be the value of clothing sold. Selling a large number of small-value items causes higher staffing costs than does selling a small number of high-value items. For the road haulage business the measure of activity could be the hours worked by drivers or the number of miles driven. Hours worked take no account of whether the drivers are on the road or waiting at the depot. Distance of miles traveled is a better measure of productive activity but do not distinguish full loads from empty trucks. Fuel costs are higher for a full load than for an empty truck.
Activity might be measured using a combined unit of kilogram-miles. Throughout the following chapters the word ‘activity’ will be used and measures of activity will be described. You will be expected to demonstrate your analytical skills in thinking about the meaning of the word and the relevance of the measure of activity to cost classification and cost behavior.
Output is a particular kind of activity. It is the product or service provided by the enterprise or by one of its internal sections. The output of a soft drink manufacturer is soft drinks; the output of a retail store is the clothing that it sells. Outputs are directly proportional to the activities. If we get some activities done, there must be some output. However, there are standard ratio between activity and output. If the ratio is not correct, the business will lead to a loss.
Ms. Ateeya Manzoor is a manageing director and management strategist and partner at Mayfair Management Group.
As a professional with over fifteen years of experience, Ateeya Manzoor has worked with a large range of clients in various industries and sizes, ranging from large publicly traded financial institutions and technology firms, large resorts to midsized oil and gas companies, to small non-profits requiring a fresh perspective.
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