Batch-level activities are production tasks or processes that occur each time a batch or group of similar products is produced, regardless of the number of units within the batch. These activities are indirectly related to individual product units, and their costs are considered indirect costs. Batch-level activities are a key component of activity-based costing (ABC) systems, which aim to more accurately allocate indirect costs to products or services.
Examples of batch-level activities include:
- Machine setup: Preparing machines and equipment for a specific production run or batch.
- Quality inspection: Checking a batch of products for quality control purposes after the production run.
- Batch-related paperwork: Processing documentation, such as work orders or production schedules, associated with each batch.
- Material handling: Moving raw materials, work-in-progress, or finished goods between production stages for each batch.
In an activity-based costing system, batch-level activity costs are allocated to individual products by dividing the total cost of the batch-level activity by the number of units produced in the batch. This allocation helps businesses better understand the true cost of producing each product, which in turn supports more informed decision-making regarding pricing, production planning, and inventory management.
Example of Batch-Level Activities
Let’s consider a fictional example of a toy manufacturing company that produces two types of action figures, Model A and Model B. The company uses a batch production process, where it produces each type of action figure in separate batches.
Suppose the company incurs the following batch-level activity costs each time it produces a batch of action figures:
Now, let’s assume the company produces the following quantities of action figures in each batch:
- Model A: 500 action figures
- Model B: 1,000 action figures
The total batch-level activity cost for each type of action figure is the sum of the machine setup cost, quality inspection cost, and material handling cost: $200 + $100 + $50 = $350.
To allocate the batch-level activity costs to individual action figures, divide the total batch-level activity cost by the number of action figures produced in each batch:
- Model A: $350 / 500 action figures = $0.70 per action figure
- Model B: $350 / 1,000 action figures = $0.35 per action figure
The allocated batch-level activity costs for each type of action figure are:
- Model A: $0.70
- Model B: $0.35
By allocating the batch-level activity costs to individual action figures, the toy manufacturing company can better understand the total cost of producing each action figure and make more informed decisions about pricing, production planning, and inventory management.