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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Which statement about cost hierarchy in Activity Based Costing is correct?

Batch-level activities such as machine setups vary with the number of batches, not the number of units produced. Unit-level activities occur with every unit, product-sustaining costs relate to maintaining a product line, and facility-sustaining costs lack a causal driver, so the other statements are incorrect.

  1. ABatch-level activities, such as machine setups, vary with the number of batches rather than the number of unitsCorrect
  2. BUnit-level activities are performed only once for each batch produced
  3. CFacility-sustaining costs are best traced to products using units produced as a cost driver
  4. DProduct-sustaining activities vary directly with the number of units produced

Explanation

Batch-level activities such as setups, scheduling and batch inspection are driven by the number of batches. Unit-level activities are performed for every unit, not once per batch. Facility-sustaining costs are generally not traceable to products by a causal driver, and product-sustaining costs depend on the product line rather than units.

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