Activity Centre

Posted in Finance, Accounting and Economics Terms, Total Reads: 439

Definition: Activity Centre

An activity centre is defined as the combination of various activity costs involved in an Activity Based Costing (ABC) system.

The approach consists of four steps as follows

a. Identify major activities

b. Group costs of activities into cost pools

c. Identify measures of activities- the cost drivers

d. Relate costs to products using the cost drivers

The advantages of defining such centres are:

- Activity analysis is aimed at improving efficiency and effectiveness of business processes

- ABC focus is on measuring cost of products and services. Activity Centre focus is on goal of managing the activities themselves

- Determines major activities

- Identify resources used by each activity

- Evaluate the performance of the activities

- Identify ways to improve the efficiency and/or effectiveness of the activities

Consider the example of an air conditioning unit. Each of the activity centres has an associated cost driver or its respective factors that influence these costs. The various costs are divided into Activity Centres as:

a. Machinery- No. of machine hours

b. Data Maintenance- No. of products administered

c. Material Handling- No. of products

d. Product shipment- Distance (in km)

e. Customer Service- No. of customer contacts etc


In this way, different overhead costs can be sub divided into several centres for further cost analysis

Limitations of this system:

• Expensive to develop and maintain than a traditional costing system

• Lacks information necessary for further decision making



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