However, to the extent that these costs are caused by specific products, excluding them results in misleading information for
making decisions. It is true that these non-manufacturing costs can be deducted from product revenues in addition to unit product
costs when decisions are made, but this is not always done. It is probably safer to build these costs right into product costs,
which is the approach taken in this chapter. (Remember, these costs are to be used for making decisions, not valuing inventory
and cost of goods sold.)
Multiple overhead cost pools in ABC.
Traditional overhead costing systems are described in Chapters 2, 3, and 4. In these
traditional systems, an entire plant may have a single overhead cost pool or each production department may have a separate
overhead cost pool. In nearly all cases, overhead costs are applied to products using either direct labor-hours, direct labor cost, or
machine-hours. In activity-based costing, each major activity has its own separate overhead cost pool. An activity is any event
that causes the consumption of resources. The activities tracked in the ABC system may cut across many departments and the
measures of activity (i.e., allocation bases) may be quite different from the traditional allocation bases.
Cost Hierarchy in Activity-Based Costing.
(Exercises 8-8, 8-13, and 8-15.) Thousands of activities are carried out in most
organizations. It would not be practical to track all of them in an activity-based costing system. A great deal of simplification is
necessary. Activities and their costs must be combined to reduce complexity and record-keeping requirements. One way to simplify
is to group activities into a hierarchy. Activities, and their costs, can be combined within each level of the hierarchy into activity cost
pools—hopefully with minimal loss in accuracy. The cost hierarchy used in the text is not the only scheme that could be used, but it
is reasonably comprehensive. The levels in the hierarchy are as follows:
These activities are performed each time a unit is produced. For example, providing power to run
processing equipment is likely to be a unit-level activity.
These activities are performed each time a batch is handled or processed, regardless of how many units
are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to
customers are batch-level activities.