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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Sahyadri Components Ltd. incurs a cost every time a production run is started, because the machines must be cleaned, reset and calibrated, irrespective of how many units are made in that run. Under the ABC cost hierarchy, this cost is best classified as:

Setup cost is a batch-level activity cost. It is incurred each time a production run starts and varies with the number of batches, not with the number of units produced in each batch. Unit-level costs arise on every unit, so they do not fit.

  1. AUnit-level activity cost
  2. BBatch-level activity costCorrect
  3. CProduct-sustaining activity cost
  4. DFacility-sustaining activity cost

Explanation

Batch-level costs are incurred each time a batch or run is processed and vary with the number of batches, not the number of units. Setup costs are the standard example. Unit-level costs are incurred on every unit, so they would be wrong here because setup cost does not rise with units in a run.

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