Question

Identify the four level hierarchy that in which costs are grouped while creating an Activity-Based Costing System. Choose a manufacturing company and identify three types of costs that should be included in each category.

Answer 1

The four levels of cost hierarchy used in the ABC system are:

1. Unit Level Costs
2. Batch Level Costs
3. Product Level Costs
4. Facility Level Costs

For a company engaged in producing automobiles:

Unit level costs are those which vary with the volume of production: Electricity Costs, Metal Coating, Painting,

Batch level costs are costs which vary with the number of batches run: Machine Setup Costs, Purchase Ordering Costs, Inspection Costs

Product level costs vary with the number of product lines: Product Design Costs, Research and Development Costs, Engineering Change Costs

Facility Level Costs vary with the number of facilities: Rent Cost of the facility, Audit Costs, Depreciation of the plant and buildings.