Page 30 - P1 Integrated Workbook STUDENT 2018

Chapter 2

2.2 Hierarchy of costs

Activity costs can be classified according to the following hierarchy.

 Unit level – these are activities where the consumption of resources is very
strongly correlated with the number of units produced. Costs traditionally
defined as direct costs would fall into this category, for example direct material
and direct labour

 Batch level – these activities – consume resources in proportion to the number
of batches produced, rather than in proportion to the number of units produced.
For example, machine setup, materials handling and batch inspection

 Product level – activities performed to sustain the existence of a particular
product line. Consumption of resources by, for example, administration, product
specification or purchasing may be related to the existence of particular
products.

 Facility level – costs that relate simply to being in business and that therefore
cannot be related in any way to the production of any particular product line.
Grounds maintenance, plant security and property taxes would be examples of
this type of cost.

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