In activity-based costing, what constitutes an activity?

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Activity-based costing is a method of cost accounting that documents the resources spent on every activity associated with producing a particular product or service. It is useful as a tool to manage non-direct costs of production and assign them to a specific product or service—for example, it might also factor in the cost of a custodian who cleans the bathrooms of a call center, as opposed to only counting the resources spent on directly providing the service (which might include things like the phone bill for the office as well as the labor done by operators).

As such, an "activity" can be any operation that a firm undergoes that directly creates or supports the creation of a product or service. Activities are costs, essentially, or things that a business spends money/resources on. Activities can either directly create products—for example, the operation of a factory or manufacturing plant—or indirectly impact production, as in the above example of the custodian. Additional examples of activities include things like marketing, customer service departments, retail employees, management, human resources, and organization of equipment and utilities (which include things like manufacturing machines, computers, cash registers, electricity, Wi-Fi, phone service, and water or heating for buildings).

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