Final answer:
An activity base is a measure that causes a change in variable costs, like the quantity of units produced. It is different from fixed costs, such as rent, which do not change with production levels.
Step-by-step explanation:
An activity base is a measure of whatever causes a variable cost to be incurred. In accounting and budgeting, a company's costs can be divided into fixed costs and variable costs. Fixed costs are costs associated with fixed inputs, such as capital, and these costs do not change regardless of the level of production in the short run. An example of fixed cost is the rent on a factory or a retail space, which remains constant whether a lot or little is produced. On the other hand, variable costs are those that a firm incurs in the process of production, and these costs change with the level of output.
Understanding the activity base helps companies determine how changes in production levels affect their costs and can aid in financial planning and decision-making. It is essential for pricing, cost analysis, and budgeting exercises to understand how various cost drivers impact overall expenditures, especially variable costs.