Activity Dictionary - Finance

The activity dictionary names the activity (usually by using an action verb and an object that receives the action), describes the tasks that make up the activity, lists the users (cost objects), and identifies a measure of activity output (activity driver). The three products, classic, gold, and platinum credit cards, in turn, consume the activities. It is not unusual for a typical organization to produce an activity dictionary containing 200 to 300 activities. Once activities are identified and described, the next task is to determine how much it costs to perform each activity. This determination requires identification of the resources being consumed by each activity. Some cost system experts consider this task to be the most difficult one in creating an accurate cost system. Activities consume resources such as labor, materials, energy, and capital.

The cost of these resources is found in the general ledger, but the money spent on each activity is not revealed. Thus, it becomes necessary to assign the resource costs to activities by using direct and driver tracing. For labor resources, a work distribution matrix often is used. A work distribution matrix identifies the amount of labor consumed by each activity and is derived from the interview process (or a written survey). Resource drivers are factors that measure the consumption of resources by activities. Once resource drivers are identified, then the costs of the resource can be assigned to the activity. Labor, of course, is not the only resource consumed by activities.

Activities also consume materials, capital, and energy. The interview, for example, reveals that the activities within the credit card department use computers (capital), phones (capital), desks (capital), and paper (materials). The automatic teller activity uses the automatic teller (capital) and energy. The cost of these other resources must also be assigned to the various activities. They are assigned in the same way as was described for labor (using direct tracing and resource drivers). The cost of computers could be assigned by using direct tracing (for the supervising activity) and hours of usage for the remaining activities. From the interview, we know the relative usage of computers by each activity.

The general ledger reveals that the cost per computer is $1,200 per year. Thus, an additional $6,000 (5 3 $1,200) would be assigned to three activities based on relative usage: 70 percent to processing transactions ($4,200), 20 percent to preparing statements ($1,200), and 10 percent to answering questions ($600). Repeating this process for all resources, the total cost of each activity can be calculated. To calculate an activity rate, the practical capacity of each activity must be determined. To assign costs, the amount of each activity consumed by each product must also be known. Visit Finance Dictionary blog about how to learn  your Activity Dictionary Finance.

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