Activity base refers to activity-based costing, where organizations measure the cost of resources compared to output. It helps control costs, make strategic decisions, and improve profitability by adjusting prices and eliminating unprofitable products/services. ABC measurement helps allocate resources across all areas to produce the best results.
In the business world, activity base refers to the concept of ABC or activity base costing, which is a way in which organizations measure the cost of human and capital resources compared to the amount of output achieved. In order for an organization to control the costs associated with doing business in the production of goods and services, a system for measuring all resources must be in place. Therefore, the activity base is where the company documents the profitability of this careful balance between resources and revenues.
When an organization is able to make a profit or increase revenue based on its activity base, it is generally considered to be in good business condition. Failure to recognize the critical point at which resources produce the best gains can be detrimental to the success of an organization focused on producing high-quality goods and services. If the ABC is too low, it means that there is a shortage of resources needed to do 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 regarding adding staff, equipment, and more resources to perform more services or produce more goods. By adding more products and services or increasing manpower, an organization generally expects to achieve higher levels of profitability. The more profitable an organization is, the higher the ABC level becomes, which is a measure of organizational growth.
In addition to providing a clearer picture of the nature of productivity in an organization, base activity can also be an indicator of the price levels of products and services. If the base level is high, it means that prices can be adjusted downwards, which will increase the rate at which products can be sold in the market, which will generally increase revenues over time. On the other hand, if the activity level is low, prices can be raised 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 that are not earning a reasonable amount of revenue. ABC measurement can be easily monitored to get a more accurate picture of what each department or division of the organization is doing so that resources are properly allocated across all areas to produce the best results. This helps an organization in developing new programs that may involve acquiring new capital or human resources.
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