Glossary
Hierarchy of Cost Assignability
Tags: Glossary
In cost accounting, an approach is used to group activity costs at the level of an organization where they are incurred or can be directly related to. Examples include the level where individual units are identified (unit-level), where batches of units are organized or processed (batch-level), where a process is operated or supported (process-level), or where costs cannot be objectively assigned to lower-level activities or processes (facility-level). This approach is used to better understand the nature of the costs, including the level in the organization at which they are incurred, the level to which they can be initially assigned (attached), and the degree to which they are assignable to other activity and/or cost object levels, i.e., activity or cost object cost or sustaining costs.
What is Hierarchy of Cost Assignability?
The Hierarchy of Cost Assignability is a concept used in cost accounting to group activity costs at different levels within an organization. This approach helps us understand the nature of costs, where they are incurred, and how they can be assigned to different activities or cost objects.
At the lowest level of the hierarchy, we have the unit-level costs. These costs are directly related to the production or acquisition of individual units. For example, the cost of raw materials used to manufacture a single product or the labor cost associated with assembling a single unit would fall under unit-level costs. These costs can be easily assigned to specific units or products.
Moving up the hierarchy, we have batch-level costs. These costs are incurred when a group or batch of units is organized or processed together. For instance, the cost of setting up a production line for a specific batch of products or the cost of quality control for a group of units would be considered batch-level costs. These costs can be assigned to a specific batch of units.
Next, we have process-level costs. These costs are associated with operating or supporting a particular process within the organization. For example, the cost of maintaining a specific production process or the cost of training employees to operate a particular machinery would be considered process-level costs. These costs can be assigned to a specific process.
Finally, we have facility-level costs. These costs cannot be objectively assigned to lower-level activities or processes. Facility-level costs are incurred to support the overall functioning of the organization, such as rent, utilities, or administrative expenses. These costs are not directly assignable to specific activities or cost objects and are typically allocated to different departments or cost centers based on some allocation basis, such as square footage or headcount.
The hierarchy of cost assignability helps us understand the different levels at which costs are incurred within an organization and the degree to which they can be assigned to specific activities or cost objects. By categorizing costs into different levels, we can better analyze and manage costs, allocate resources effectively, and make informed decisions regarding pricing, product profitability, and process improvements.
In summary, the hierarchy of cost assignability is a valuable tool in cost accounting that allows us to group costs at different levels within an organization. It helps us understand the nature of costs, their assignability to specific activities or cost objects, and enables better cost management and decision-making.