activity measure

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In activity-based costing systems, a measure of the volume or rate of activity in an activity cost pool used as a basis for allocating costs. Ideally, the activity measure chosen will be such that any rise or fall in the measure correlates closely with a rise or fall in the total cost of the activity. The terms activity measure and cost driver are therefore often used synonymously (see also allocation base). Examples of activity measures include direct labour hours, machine hours, number of deliveries, units of output, and number of production run set-ups. In a large international organization there may be thousands of activity measures, whereas a smaller organization may identify only 20–30 such measures. It is important to state that there is no optimal number of activity measures for an organization. Note also that managers often identify more than one activity measure for each activity.

Some activity measures, such as labour hours, are very closely related to the volume of production, whereas others, such as the number of orders, are not.

Subjects: Accounting.

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