What is an Activity Base?

An activity base is a measured activity that is used to allocate overhead costs. An activity base should be used when there is a direct causal relationship between it and the overhead costs being incurred. A more complex allocation system might employ several activity bases.

Example of an Activity Base

As an example of an activity base, the number of machine hours used during a reporting period is a reasonable activity to use as the basis for allocating machine costs to units produced. Or, the number of labor hours consumed in the production area can be used as the basis for allocating indirect labor costs to units produced.

Activity Base Best Practices

Whenever possible, use activity bases for which information is already being accumulated by the accounting system. By doing so, you are avoiding the incurrence of any additional costs. This is an especially good idea when there is already an activity base being tracked for which a reasonable causal relationship with the targeted overhead costs already exists.