Activity accounting collects, summarizes and reports financial information from a company’s various decision centers. Decision centers can also be called responsibility centers. An organization’s responsibility centers trace costs, revenues or profits related to specific tasks. Managers use activity accounting to make business decisions based on the financial information from each responsibility center. These managers usually work at an organization’s operational level and have well defined responsibilities.
Business owners, directors and executive-level managers often delegate duties or responsibilities to lower-level managers. The delegation process allows operational managers an opportunity to showcase their skills through managing a portion of the business's operational and financial information. Activity accounting can also be used as a measurement technique relating to managerial performance. Organizations may use individual of general ledgers, financial statements and other reports to gauge the financial performance of various business operations.
Activity accounting procedures or methods may not be universal among all business operations. For example, the sales department of an organization can include financial information relating to sales, discounts, returns and cost of goods sold. The sales department might have very few expenses compared to other business operations. These expenses can be related to office supplies and other basic items. Sales managers will only be responsible for the financial information under their direct control.
Manufacturing companies commonly use activity accounting because their operations contain copious amounts of financial information. Resource acquisition, human resources, equipment purchases and other information are commonly broken down into various responsibility centers. Each responsibility center will have specific financial information. Activity accounting tracks this information so companies can properly allocate all business costs to goods and services produced. Accurate cost allocation ensures companies will be able to recoup business costs when selling goods or services to consumers.
Other companies use activity accounting to capture financial information unique to their operation. This accounting method allows companies to create internal accounting procedures to accurately track and report information for business decisions. Internal activity or management accounting procedures do not usually conform to regular financial accounting standards. This flexibility ensures companies can measure their managerial or operational performance using financial indicators. Indicators can include return on investment, net present value, gross profit margin or other similar formulas.
Activity accounting can create difficulties for companies when training managers or other employees. Individuals do not usually have previous experience in the company's specialized accounting procedures. Hiring new accounting employees will also require companies to spend more time training and educating managers or accountants on these specific financial procedures.