An activity measure in activity-based costing (ABC) systems is a metric that gauges the volume or rate of an activity. It serves as a basis for cost allocation within an activity cost pool, correlating changes in the measure with changes in total activity cost.
In management accounting, an allocation base is used to distribute costs to cost objects. A crucial component of both traditional costing systems and Activity-Based Costing (ABC), the allocation base plays a significant role in accurate cost allocation.
An arbitrary allocation refers to a cost allocation process that uses an allocation base unlikely to yield accurate costs. Examples include using the number of students to allocate the cost of a lecture, irrespective of the class size.
The basis used for the equitable apportionment of costs between several cost centres when direct assignment is not feasible.
Cause-and-effect allocation is a cost allocation method where the allocation base is a significant determinant of the cost. This method ensures accurate assignment of indirect costs to cost objects.
Cost allocation is the process of assigning indirect costs to specific cost objects in a way that reflects resource consumption. This is crucial for making informed decisions, setting prices, and measuring profitability.
In a system of activity-based costing, any factor such as the number of units, number of transactions, or duration of transactions that drives the costs arising from a particular activity. When such factors can be clearly identified and measured, they serve as the basis for allocating costs to cost objects.
