Definition: You might think that the word “activity” is not really an accounting term, but it is. An activity is a cost accounting term that usually refers to a type of work that was done.
What Does Cost Accounting Activity Mean?
An activity and job are often used interchangeably, but that isn’t always correct. An activity is usually only one part of a job. Most jobs include several activities. Managerial accountants track total job costs, or how much money it takes to complete a job, by activities that were performed. An activity is actually a very important part in activity-based costing.
Example
A managerial accountant will look at each activity in the production process. Take a guitar manufacturer for example. The job of building a guitar can be broken down into many different activities. First the guitar body and neck need to be cut, machined, and glued. Second, the guitar must be sanded and fitted together. Third, guitar is finished and the hardware is installed. A managerial or cost accountant would look at each one of these activities and analyze their costs. They might even break down the activities into sub-activities to separate the cost structure even further. After all the production activities are analyzed, a total production cost can be calculated.
Separating a production process into activities and analyzing their costs is the start of a corporate budgeting process called activity-based budgeting. Management can use this information to improve the company’s production efficiency and product line. This process is called activity-based management.
