Identification of activities for ABC
Meaning of Activities: Activities comprise of units of work or tasks. For example, purchase of materials is an activity consisting a series of tasks like purchase requisition, advertisement inviting quotations, identification of suppliers, placement of purchase order, follow-up etc.
Types of Activities: Activities basically fall into four different categories, known as the manufacturing cost hierarchy. These categories were first identified by Cooper in 1990 and help to determine the type of activity cost driver required. The categories are:
| Type of Activity | Examples | ||||
| Unit level activities: These are activities for which the consumption of resources can be identified with the number of units produced. It is performed each time a unit is produced. | Use of indirect materials/consumables. | ||||
| Batch level activities: The costs of some activities are driven by the number of batches of units produced. These are activities related to setting up of a batch or a production run. It is performed each time a batch is processed. | Material ordering, Inspection of Products. | ||||
| Product level activities: The cost of some activities are driven by the creation of a new product line and its maintenance. | Designing the product, Producing parts specifications and keeping technical drawings of products. | ||||
| Facility Level Activities: It must be carried out regardless of which products are produced. These are activities necessary for sustaining the manufacturing process and cannot be directly attributed to individual products | Plant Security, Production Manager’s Salary and Maintenance of buildings. |
Illustration 1
Autolite Private Ltd. an auto repair business, uses activity based costing and accumulates overhead costs in the following cost pools:
- Human Resources
- Parts management
- Purchasing
- Quality Control
- Equipment set-up
- Training employees
- Assembly department
- Receiving department
You are to find out for each cost pool whether the cost pool would be unit-level, batch-level, product-level or facility level.
Solution:
| ACTIVITY COST POOL | HIERARCHY |
| Human Resources | Facility-level |
| Parts management | Product-level |
| Purchasing | Batch-level |
| Quality Control | Unit-level |
| Equipment set-up | Unit-level |
| Training employees | Facility-level |
| Assembly department | Unit-level |
| Receiving department | Batch-level |
