Question

What is activity analysis? What is the most important part of activity analysis? Identify and define four different ways to manage activities so that costs can be reduced. Provide examples of each of the four methods.

Answer 1

Activity analysis is the process of identifying, describing, and evaluating the activities an organization performs. In activity-based cost accounting, a budgeting process employing knowledge of activities and driver relationships to predict workload and resource requirements in developing a business plan.

The most important part as per me is the identification of the activities which a business usually conducts.

Activity management can reduce costs in four ways:1

1. Activity elimination

2. Activity selection

3. Activity reduction

4. Activity sharing

Activity elimination focuses on eliminating non-value-added activities. For example, the activity of expediting production seems necessary at times to ensure that customers’ needs are met. Yet, this activity is necessary only because of the company’s failure to produce efficiently.

Activity selection involves choosing among various sets of activities that are caused by competing strategies. Different strategies cause different activities. Different product design strategies, for example, can require significantly different activities. Activities, in turn, cause costs.

Activity reduction decreases the time and resources required by an activity. This approach to cost reduction should be aimed primarily at improving the efficiency of necessary activities or act as a short-term strategy for moving non-value-added activities toward the point of elimination. For example, by improving product quality, customer complaints should decrease and, consequently, the demand for handling customer complaints should decrease.

Activity sharing increases the efficiency of necessary activities by using economies of scale. For example, a new product can be designed to use components already being used by other products. By using existing components, the activities associated with these components already exist, and the company avoids the creation of a whole new set of activities.