What is the hierarchy of costs?

The hierarchy of costs is the categorization of costs by activity levels.

The different levels of activity costs are:

• Expenses related to the number of products: these charges are incurred every time an output unit is completed. They vary depending on the volume of production output production, which can be a product or service.
• Expenses related to the lots: these charges and costs are incurred when each batch is delivered during the activity. The lot or group of products concerned are processed together, regardless of the number of items in the lot.
• Expenses related to product characteristics: they are sustained by activities that provide services for a range of products for any number of items that would be manufactured.
• Expenses related to the structure of society: they are sustained by the mere existence of a production facility, or organization or an economic unit as a whole regardless of the range of product mix or the service mix or number of manufactured items.

1.) output unit-level costsCosts are the costs of activities performed on each individual unit of a product or service. 2.) Batch-level costsThese are costs of activities related to a group of units of a product or service rather than an individual unit of product or service.3.) Product-sustaining costs (Service-sustaining costs) these types of costs are for activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced4.)Facility-sustainting costscosts of activites that managers cannot trace to individual products or services but that support the organizarion as a whole.

The activity based costing involves for identifying activities and classifying according to the cost. Cost hierarchy are classified activities based are traceable to a product. The level are 1. Unit level, 2. Batch level, 3. Product level & 4. Facility level. This activity level according to how expensive there. for more expensive activities level are not automatically reduced or eliminated. A cost hierarchy priority for activities easier. This is the budgeting decesion.

Cost Hierarchy A listing of all a company's or department's activities according to how expensive they are. While more expensive activities are not automatically reduced or eliminated, a cost hierarchy may make prioritization of activities easier, which may in turn influence budgeting decisions.