What Are Batch-Level Activities?
Batch-level activities are work actions that are classified within an activity-based costing accounting system, often used by production companies. Batch-level activities are related to costs that are incurred whenever a batch of a certain product is produced. However, these costs are accounted for regardless of the related production run’s size. Examples of these batch-level cost drivers can often include machine setups, maintenance, purchase orders, and quality tests.
- Batch-level activities are costs related to the production of a batch of one product.
- Batch-level activities can include machine setup, quality testing, maintenance, and purchase orders.
- Batch-level activities are part of a five-faceted structure of activity-based costing.
- Activity-based costing provides a more detailed account of costs than more traditional forms of volume accounting.
- Activity-based costing and, as a result, batch-level activity accounting were started in the 1930s by Eric Kohler.
How Batch-Level Activities Works
Batch-level activities are one of the five broad levels of activity that activity-based costing account for. Each of these levels is assessed by cost, and these costs are allocated to the company’s overhead costs. The other levels of activity that are accounted for by activity-based costing are unit-level activities, customer-level activities, production-level activities, and organization-sustaining activities.
Unit-level activities are activities that are related to producing each unit. Unit-level activities happen each time a product is made. This is unlike batch-level activities that happen every time a batch of products are produced. Unit-level activities are those that support making each individual unit, while batch-level include a group of units.
Activity-based costing is a system that provides detailed information regarding a company’s production expenditures. This system of accounting provides far more reliability and accuracy than traditional volume-based cost accounting systems, which can often ignore sales-related costs and which can, as a result, provide misleading information about the profitability of products, product lines, customers and markets. It does better to assign costs to the causes of those costs.
By more accurately and reliably classifying overhead costs at the batch level than traditional cost accounting systems, it is easier for manufacturers to determine the breakeven point of cost and units produced, through cost-volume-profit analysis. This helps managers identify non-value-adding activities and process inefficiencies, and increase profitability.
Certain activities, such as maintenance or quality control, can oftentimes be accounted for in multiple levels of activity-based costing.
Example of Batch-Level Activity
Machine setup is an often-used example of a batch-level activity. The way in which companies will structure the schedule by which machines are set up is an example of how batch-level activity accounting can influence the practices of a manufacturer. Because there are costs incurred for every time a machine is set up to produce a batch of products, companies will often set up machines to produce large amounts of one product before setting them up again to produce a different type of product. This type of practice is likely to have been developed out of an awareness of the specific costs related to producing a batch of each product.
History of Batch-Level Activities
The concept of activity-based costing and, as a consequence, batch-level activity accounting, started in the 1930s. Eric Kohler was a Comptroller of the Tennessee Valley Authority. The TVA was in the process of accounting for costs surrounding activities involved with flood control, navigation, and hydro-electric power generation.
Kohler found that a traditional form of managerial accounting was not going to suffice in properly and accurately accounting for the costs that were being incurred by the TVA in the process of carrying out their duties. Kohler introduced the concept of accounting for the costs of these processes by accurately assessing the activities involved in carrying them out.
Kohler defined an activity as a portion of work done by a specific part of the company. By tracking the costs of such activities in various parts of the company, Kohler began the precedent of accounting for the cost of work activities.
In more modern times, the process of activity-based costing has grown to specify the five aforementioned levels of unit-level activities, batch-level activities, customer-level activities, production-level activities, and organization-sustaining activities.