What is an Activity Center
An activity center is a designated cost accounting area where a pool of costs associated with a particular process are recorded. Activity centers are defined or delineated for the purposes of maintaining activity-based costing (ABC) systems. Each activity center is separately identified and can be assigned to specific cost drivers. In this manner, a large overhead cost pool can be subdivided into several activity centers to aid in cost analysis.
BREAKING DOWN Activity Center
As an illustration, overhead costs in a manufacturing plant might be divided into four different activity centers: machining activity costs, assembly activity costs, quality inspection activity costs and storage activity costs. Each of these four activity centers has associated cost drivers, or factors that influence the costs. Machining activity costs, for instance, take into consideration machine or processing hours. Assembly activity costs take into account the total number of parts used. Quality inspection activity costs reflect the number of inspections that must occur, while storage activity costs may encompass the number of loadings or stacking movements.
Advantages of Setting Up Activity Centers
Setting up clearly marked activity centers is the first step in an ABC system for a company. ABC improves cost accounting in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide bucket, it groups costs in activity centers. Second, it creates new bases for assigning overhead costs that are not tied to production volume measures such as machine hours or direct labor hours. Third, by creating different activity centers and assigning itemized costs to them, a company will have a better set of data to analyze in order to improve profitability margins. A particular activity center that runs at a higher cost than the industry norm or what is acceptable to the company can be addressed. Without ABC, the company may not have enough insight to handle the cost issue.