## Cost Hierarchy — Levels of Activities under ABC
ABC classifies activities into a hierarchy based on what causes the cost to be incurred. Identifying the level helps select the correct cost driver.
| Level of Activity | Meaning | Examples |
|---|---|---|
| Unit-Level | Resource usage depends on the number of units produced | Indirect materials rising with output; inspection/testing of every item (or every 100th item) |
| Batch-Level | Performed for each batch; cost shared across all units in that batch | Material ordering per batch; machine set-up between batches; inspection of the first item in every batch |
| Product-Level | Support specific products in a product line | Product design; parts specification; updating technical drawings |
| Facility-Level | Not tied to any specific product but needed for manufacturing as a whole | Building maintenance; plant security |
### How to use the hierarchy
- Unit-level costs vary with volume → driver is units/hours.
- Batch-level costs vary with number of batches/set-ups → driver is number of batches or set-ups (NOT units).
- Product-level costs vary with product variety → driver relates to number of products/design changes.
- Facility-level costs are essentially fixed and are often spread on a general basis since no clear driver exists.
### Why it matters
Misclassifying a batch-level cost (e.g., set-up) as a unit-level cost is exactly the distortion ABC was designed to fix — a small batch of a complex product carries the same set-up cost as a large batch, so per-unit it is far higher.