Activity Levels in an Activity-Based Costing System

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  • 0:03 Four Levels of Activity
  • 1:04 Unit-Based Costs
  • 1:59 Batch-Based Costs
  • 2:44 Product-Based Costs
  • 3:28 Facility-Based Costs
  • 3:50 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

With ABC, or activity-based costing, we must first identify into which activity category a cost should be placed. In this lesson, we learn about the four general groups associated with ABC: unit-based, batch-based, product-based, and facility-based costs.

Four Levels of Activity

The past several years have seen a marked jump in the number of businesses that are using the activity-based costing methodology in order to better understand their expenses. With activity-based costing, sometimes referred to as ABC, companies account for expenses by categorizing the source of the cost into one of four general groups: unit-based, batch-based, product-based, and facility-based costs.

The benefit of activity-based costing lies in the idea that looking at the source of the expense allows for more control than earlier systems that treated manufacturing or labor costs as giant, monolithic blocks. Think about it. Now, instead of having to simply accept that manufacturing costs account for a big chunk of your money, you can more closely examine the expenses to figure out exactly what activities are costing you money.

In this lesson, we'll look at the four tiers of activity that Activity-Based Costing is concerned with, looking at examples of each along the way.

Unit-Based Costs

Unit-based costs are those expenses associated with a single and particular unit of production. For example, if you are making a bunch of widgets and notice that one of them could use another coat of paint, that is an example of a unit-based price. Generally speaking, unit-based costs are often quite small in the grand scheme of things. However, if your company manufactures a small number of high-value units, unit-based costs could quickly add up.

For instance, let's say that you ran a jewelry factory in which a machine manufactured the rings. Most of the time, things ran beautifully. But occasionally, a ring would contain significant flaws. In these cases, you have to send any damaged rings to a jeweler for repair. Each time you send a ring out, that would be a unit-based cost. Depending on the expenses associated with the jeweler's repair and how frequently your ring machine made mistakes, the costs could add up quickly!

Batch-Based Costs

Batch-based costs are expenses associated with a batch, or a particular group of units produced. If you've ever looked at the printed numbers on a carton of milk, these help to identify the batch number in case anything went wrong with that batch of milk. If a recall had to be made, the information would apply to all of the gallons of milk that had that batch number to ensure that all of the contaminated product was recalled.

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