Everyday action impairments often are observed in demented older adults, and they are common potential barriers to functional independence. We evaluated whether the ability to segment and efficiently encode activities is related to the ability to execute activities. Further, we evaluated whether brain regions important for segmentation also were important for action performance. Cognitively healthy older adults and those with very mild or mild dementia of the Alzheimer's type watched and segmented movies of everyday activities and then completed the Naturalistic Action Test. Structural MRI was used to measure volume in the dorsolateral prefrontal cortex (DLPFC), medial temporal lobes (MTL), posterior cortex, and anterior cingulate cortex (ACC). Dementia status and the ability to segment everyday activities strongly predicted naturalistic action performance, and MTL volume largely accounted for this relationship. In addition, the current results supported the Omission-Commission Model: Different cognitive and neurological mechanisms predicted different types of action error. Segmentation, dementia severity, and MTL volume predicted everyday omission errors, DLPFC volume predicted commission errors, and ACC volume predicted action additions. These findings suggest that event segmentation may be critical for effective action production, and that the segmentation and production of activities may recruit the same event representation system.