Question

Discuss the various levels of “cost hierarchy” and give examples

Answer 1

It is used in activity-based costing system.

Required levels are as below:

No.1) Unit level: Activities like producing or manufacturing goods should come under this category, since goods are produced in units and each unit has unit cost of production. Examples are direct material cost, direct labor cost, etc.

No.2) Batch level: There may be several units of production in a batch for a batch-level activity. There may be an additional cost in each batch. Machine setup cost is an example of it.

No.3) Product level: this is the cost of making a product; therefore, the aggregate of direct material cost, direct labor cost, variable overhead, etc. should be the product cost. Selling and administrative costs should not be considered here since these are not product level.

No.4) Facility level: this is all sorts of indirect cost, which require facilitating the production. Staff salary in material management team is an example for it – the team calculates economic ordering quantity (EOQ).