Product Level Activity
“Product Level Activity” is a term often used in the context of activity-based costing (ABC), a method of assigning the organization’s resource costs through activities to the products and services provided to its customers.
Product level activities are those tasks or operations performed to support the production or delivery of each product or service. These activities are performed regardless of the number of batches or units produced. For example, designing a product, setting up machinery or equipment for a product, or managing a product line are all product level activities.
The cost of these activities is directly attributable to specific products and typically does not change regardless of the volume of units produced. By identifying and understanding product level activities, businesses can more accurately assign costs to each product, which can help with pricing decisions, profitability analysis, and operational efficiency.
To summarise, “product level activity” in ABC refers to activities that are associated with, and costs that are incurred for, specific products or services provided by a business.
Example of Product Level Activity
Suppose you have a company that manufactures two types of bicycles: mountain bikes and road bikes. Each type requires a specific setup of machinery due to differences in design and function.
- Designing Products: Before the production process begins, your engineers spend time designing each bike. They create blueprints, decide on the materials to be used, and plan out the production process. These design costs are directly linked to each product – the mountain bike and the road bike – and not influenced by the number of bikes produced.
- Machinery Setup: Each bicycle type requires a specific setup of machinery. For instance, mountain bikes may require different tire installations or gear assembly compared to road bikes. Therefore, the cost associated with the setup process is a product level activity because it’s directly linked to each type of bicycle, regardless of the number of units produced.
- Product Management: Each bicycle type might have a dedicated product manager who oversees the production, marketing, and sales of that particular product. The salary and expenses of the product manager are directly tied to that specific product, making it a product level activity.
In all these cases, the costs associated with these activities are not dependent on the number of bicycles produced. Whether you manufacture one mountain bike or one thousand, the costs related to design, machinery setup, and product management remain the same. These costs are considered when determining the cost of each product, helping the company set accurate prices and understand the profitability of each product.
