Discuss the four different levels of costs identified by activity based costing (ABC). How should these types of costs be treated in the determination of product cost?

Answer 1

The four different levels are unit-level costs, batch-level costs, product- or process-level costs, and organizational or facility costs. Unit-level costs include direct material, direct labor, and some traceable machine costs. These are incurred once for each item produced and are considered part of total product cost. Batch-level costs include machine setup, material handling, and purchasing or ordering costs. These are incurred once for each batch of items produced and are allocated over the total number of units in the batch. These are also considered part of total product cost. Product- or process-level costs include engineering changes, design, and development costs. These are allocated to the total number of units produced in the product line and are considered part of total product cost. Organizational or facility costs include building depreciation, administrative salaries, and organizational advertising. These costs are not product-related and should be deducted from net product revenue.