For product-costing purposes, activities can be classified into one of the following four general activity categories: (1) unit level, (2) batch level, (3) product level, and (4) facility level. Classifying activities into these general categories facilitates product costing because the costs of activities associated with the different levels respond to 134 P a r t 2 / A c t i v i t y - B a s e d A c c o u n t i n g
Processing transactions . . . $130,000a Preparing statements . . . 102,000b Answering questions . . . 92,400c Providing automatic tellers . . . 250,000
a$100,000 (0.4$75,000)
b$79,500 (0.3$75,000)
c$69,900 (0.3$75,000)
Exhibit 4-15
Activity Costs: Intermediate Stage SpringBanc Credit Card Departmentdifferent types of drivers (cost behav- ior differs by level). The definition of the activities belonging to each general category clearly illustrates this feature.
Unit-level activitiesare those per- formed each time a unit is produced.
For example, machining and assembly are activities performed each time a unit is produced. The costs of unit- level activities vary with the number of units produced. Batch-level activi- tiesare those performed each time a batch of goods is produced. The costs of batch-level activities vary with the number of batches, but they are fixed with respect to the number of units in each batch. Setups, inspections (unless each unit is inspected), production scheduling, and material handling are examples of batch-level activities.
Product-level (sustaining) activities are those performed as needed to sup-
port the various products produced by a company. These activities consume inputs that develop products or allow products to be produced and sold. These activities and their costs tend to increase as the number of different products increases. Engi- neering changes, development of product-testing procedures, marketing a product, process engineering, and expediting are examples of product-level activities. Facility- level activitiesare those that sustain a factory’s general manufacturing processes.
These activities benefit the organization at some level but do not provide a benefit for any specific product. Examples include plant management, landscaping, support of community programs, security, property taxes, and plant depreciation.
135
C h a p t e r 4 / A c t i v i t y - B a s e d P r o d u c t C o s t i n g
Classic Gold Platinum
Processing transactions:
$0.13600,000 . . . $ 78,000
$0.13300,000 . . . $ 39,000
$0.13100,000 . . . $13,000
Preparing statements:
$0.8560,000 . . . 51,000
$0.8536,000 . . . 30,600
$0.8524,000 . . . 20,400
Answering questions:
$3.0810,000 . . . 30,800
$3.0812,000 . . . 36,960
$3.088,000 . . . 24,640
Providing automatic tellers:
$1.2515,000 . . . 18,750
$1.253,000 . . . 3,750
$1.252,000 . . . 2,500
Total costs . . . $178,550 $110,310 $60,540 Units . . . 5,000 3,000 2,000 Unit cost (total cost/units) . . . $ 35.71 $ 36.77 $ 30.27
Exhibit 4-16
Assigning Costs: Final StageInspection and scheduling are examples of batch- level activities.
©Digital Vision
Of the four general levels, the first three—unit level, batch level, and product level—contain product-related activities. For these three levels, it is possible to meas- ure the demands placed on the activities by individual products. Activities within these three levels can further be subdivided on the basis of consumption ratios. Activities with the same consumption ratios can use the same activity driver to assign costs.
Thus, in effect, all activities within each of the first three levels that have the same activity driver are grouped together. This final grouping creates a homogeneous set of activities: a collection of activities that are at the same level and use the same activity driver.
The fourth general category, facility-level activities, poses a problem for the ABC philosophy of tracing costs to products. Tracing activity costs to individual products depends on the ability to identify the amount of each activity consumed by a prod- uct (product demands for activities must be measured). Facility-level activities (and their costs) are common to a variety of products, and it is not possible to identify how individual products consume these activities. A pure ABC system, therefore, would not assign these costs to products. They would be treated as period costs. In effect, these costs are fixed costs—costs that are not driven by any of the cost drivers found in any of the first three categories. In practice, companies adopting ABC sys- tems usually implement a full-costing approach and allocate these facility-level costs to individual products. Unit-level, batch-level, or product-level cost drivers are often used for the allocation. As a practical matter, assigning these costs may not signifi- cantly distort product costs, because they are likely to be small relative to the total costs that are appropriately traced to individual products.
There is, however, a possible exception to this observation about facility-level costs and allocation. When a company has organized its production facilities around product lines, then it can be argued that space drivers measure the consumption of facility-level costs. This is because floor space within a plant is dedicated to the pro- duction of a single product or subassembly. In this case, square footage occupied can be viewed as a possible activity driver for facility costs. Assigning facility-level costs on the basis of space drivers can also serve to motivate managers to reduce the space needed for production, thus reducing facility-level costs over time.
136 P a r t 2 / A c t i v i t y - B a s e d A c c o u n t i n g
M a n a g e r s D e c i d e
Activity-based costing is use- ful for all types of organiza- tions and businesses. For example, the Small Business Administration (SBA) uses Oros, an activity-based cost- ing software, to determine the costs of its activities and cost objects. The SBA
adopted an ABC system because it provides a more accurate revelation of the costs of programs and serv-
ices. This enables the SBA to engage in improvements that produce a more effi- cient delivery of its pro- grams and services. ABC is used to prepare the SBA’s annual statement of net costs. It is also used to pre- pare other unit cost reports.
To maintain the accuracy of the assignment of resources costs to the various activi- ties, the SBA conducts a sur-
vey (at least annually) of its employees to assess the amount of time spent on activities. Thus, the SBA’s ABC work distribution matrix is frequently updated to ensure accurate activity cost determination. ■
Source:“Activity Based Costing,” Small Business Administration, http://www.sba .gov/cfo/abc.html, accessed July 16, 2004.