In the world of business, the activity base refers to the concept of ABC or activity base costing, which is a way that organizations measure the cost of human and capital resources in comparison to the amount of production achieved. In order for an organization to control the costs associated with doing business when producing goods and services, a system to measure all resources must be in place. Therefore, the activity base is the point at which the company documents the profitability of this careful balance between resources and revenues.
When an organization is able to realize a profit or an increase in revenue based upon the activity base, it is generally considered to be in good standing in terms of business. Failure to recognize the critical point at which resources produce better earnings can be detrimental to the success of an organization focused on producing high quality goods and services. If the ABC is too low, that means there are shortages in the resources needed to perform the work and produce the goods or services needed to sustain the organization.
The activity base methodology has typically been used to make strategic decisions concerning the addition of staff, equipment and more resources by which to perform more services or produce more goods. By adding more products and services, or increasing labor, an organization can generally expect to reach higher levels of profitability. The more profitable an organization is, the higher the ABC level becomes, which is a measurement of the organizational growth.
In addition to providing a clearer picture of the nature of productivity within an organization, the base activity can also be an indicator of pricing levels for products and services. If the base level is high that means pricing can be adjusted downward which will increase the rate at which products can be sold on the market, which overall will increase revenues over time. In contrast, if the activity level happens to be low, pricing can be increased so that the profit margin can be improved.
By measuring the activity base against profits, an organization can better estimate the cost of doing business, such as direct labor costs, and eliminate products or services which are not earning a reasonable amount of revenue. The ABC measurement can be easily monitored for a more precise picture of what each department or division of the organization is doing, so that resources are allocated properly across all areas to produce the best results. This aids an organization in the development of new programs which can involve the procurement of new capital or human resources.