Batch-level cost is the allocation of a set cost to a specific batch of products. This can be done in a variety of ways, such as by using the actual cost of the materials used in the batch or by using a standard cost per unit. This approach is most often used in manufacturing, where it is important to track costs by product type and batch size.
If you’re new to the world of overhead costing, one of the first questions you might ask is, “What is batch-level cost?” The answer to this question is often based on the definition of an activity. In general, batch-level activities refer to actions related to clusters of units. These activities are commonly referred to as product or service-sustaining activities. Each of these activities has a set price and is typically allocated to the unit(s) produced as a result.
Product-level activities are actions taken in support of a specific product
While batch-level activities are activities performed during the production of groups of units, product-level activities are performed once. Regardless of the quantity of products produced, these activities must be completed to maintain a quality standard. Batch-level activities are generally categorized according to the number of units produced. They are performed at various stages during the production process, and may include equipment setup, quality testing, maintenance, purchase orders, and more.
For example, unit-level activities include the cost of hiring a product manager, developing and maintaining the product’s specifications, creating packaging for it, and implementing engineering change notices. Unit-level activities, on the other hand, occur each time a unit is produced. This is a volume-based cost driver; the amount of unit-level activities varies with the number of units produced. The cost hierarchy also includes Batch-level activities and Unit-level activities.
Another type of activity-based costing is known as activity-based costing. This cost-management technique categorizes costs into four general groups: unit-level activities are actions taken to produce a single unit of a product. Batch-level activities happen every time a batch of products is produced. Finally, product-level activities are actions taken in support of a specific product, no matter what the production volume is.
Customer-sustaining expenses are traceable to individual customers
Indirect costs associated with a customer are a particularly important area for companies to examine. These costs can be traced back to individual customers, but Spring believes that their actions will have less effect on corporate-sustaining and distribution-channel costs than they would on direct costs. In this paper, Spring identifies five activities that constitute customer-level costs. She also indicates the cost-driver rates for each.
The cost of direct materials is traceable to the end-object, but indirect labor and resources must be accounted for. For example, preparing a product catalog may require many hours of indirect labor and other internal resources. The expense may be attributed to the customer-sustaining expense pool, but the expense may also include expenses incurred in maintaining background information about the customer’s markets and operations. The costs involved are usually not traceable back to the customer, but the expense is incurred based on the actual purchase volume.
Activity-based costing provides solutions for measuring costs
Activity-based costing involves grouping cost drivers into four main categories: plant-wide overhead rates, product or customer-level overhead rates, and batch or unit-level overhead rates. Among other things, activity-based costing measures the changes in costs at different stages in a manufacturing process. Consequently, the cost hierarchy helps managers define their cost pools and determine the drivers that drive the cost changes.
One example of activity-based costing is the creation of a product. A company may spend $200,000 to set up a production machine, while another company might spend $50,000 to setup a machine. The setup costs are the same regardless of volume, but each machine requires a different level of engineering and testing. Since each machine has different costs, the company can use Activity-Based Costing to allocate costs at a batch level.
In addition to batch level measurement, activity-based costing can be used for product costing, customer profitability analysis, and service pricing. By calculating the direct and indirect cost for each activity, a company can better understand the costs involved in their product and develop more efficient pricing strategies. For example, Company ABC uses electricity for 2,500 hours each year, which would require two workers to produce one batch. If Product XYZ uses electricity for ten hours, then the overhead costs associated with the production process will be $200.