In general, Activity Based Costing models the activities of your enterprise with a hierarchy of decreasing levels of abstraction.

For example, the diagram below shows a portion of an activity model for a widget manufacturing enterprise. The most abstract activity, Manufacture Widgets, is at the top, with the activities getting less abstract as you go down. The object is to capture all known levels of activities in which you are interested.

The lowest level activities are called Leaf Level Activities. Leaf Level Activities collect and assign the most accurate cost information. You can determine the total activity cost (at each level in the hierarchy) by adding up the costs of the child activities. In this way the total cost for “Manufacture Widgets” can be determined from an analysis of the lowest level activities in the hierarchy.