Activity base

Definition

An activity base is a measure used to allocate overhead costs to products or services based on their consumption of activities. Common examples include direct labor hours, machine hours, or units produced.

5 Must Know Facts For Your Next Test

1. Activity bases are crucial for calculating predetermined overhead rates.
2. Selecting an appropriate activity base ensures more accurate product costing.
3. Common activity bases include direct labor hours and machine hours.
4. Activity bases must reflect the cause-and-effect relationship between cost drivers and overhead costs.
5. Incorrect selection of an activity base can lead to distorted cost information.

Review Questions

• What role does an activity base play in allocating overhead costs?
• Name two common examples of activity bases used in managerial accounting.
• Why is it important to select an appropriate activity base?

Related terms

Predetermined Overhead Rate: A rate calculated before the period begins by dividing the estimated total manufacturing overhead by the estimated total amount of the allocation base.

Cost Driver: A factor that causes changes in the cost of an activity.

Traditional Allocation Method: A method that allocates overhead based on a single predetermined rate using one allocation base.