ACCOUNTING DECISIONS 169
žUnit-level activities: These are performed each time a unit is produced, e.g. direct
labour, direct materials and variable manufacturing costs such as electricity.
These activities consume resources in proportion to the number of units pro-
duced. If we are producing books, then the cost of paper, ink and binding, and
the labour of printers, are unit-level activities. If we produce twice as many
books, unit-level activities will be doubled.
žBatch-related activities: These are performed each time a batch of goods is
produced, e.g. a machine set-up. The cost of these activities varies with the
number of batches, but is fixed irrespective of the number of units produced
within the batch. Using our book example, the cost of making the printing
machines ready, e.g. washing up, changing the ink, changing the paper etc., is
fixed irrespective of how many books are printed in that batch, but variable on
the number of batches that are printed.
žProduct-sustaining activities: These enable the production and sale of multiple
products/services, e.g. maintaining product specifications, after-sales support,
product design and development. The cost of these activities increases with
the number of products, irrespective of the number of batches or the number
of units produced. For each differently titled book published, there is a cost
incurred in dealing with the author, obtaining copyright approval, typesetting
the text etc. However many batches of the book are printed, these costs are
fixed. Nevertheless, the cost is variable depending on the number of books
that are published. Similarly,customer-sustaining activitiessupport individual
customers or groups of customers, e.g. different costs may apply to supporting
retail, that is end-user, customers compared with resellers. In the book example,
particular costs are associated with promoting a textbook to academics in the
hope that it will be set as required reading. Fiction books may be promoted
through advertising and in-store displays.
žFacility-sustaining activities: These support the whole business and are common
to all products/services. Examples of these costs include senior management
and administrative staff, premises costs etc. Under ABC these costs are fixed
and unavoidable and irrelevant for most business decisions, being unrelated to
the number of products, customers, batches or units produced.
Because costs are assigned to cost pools rather than cost centres under ABC, and
as business processes cross through many cost centres, the distinction between
production and non-production overhead also breaks down under ABC. While the
distinction is still important for stock valuation (as SSAP9 requires the inclusion of
production overheads), this distinction is not necessary for management decision-
making. The more (production and non-production) overheads that are able
to be allocated accurately to product/services, the more accurate will be the
information for decision-making about relevant costs, pricing and product/service
profitability.
The ABC method is preferred because the allocation of costs is based oncause-
and-effectrelationships, while the absorption costing system is based on anarbitrary
allocation of overhead costs. However, ABC can be costly to implement because
of the need to analyse business processes in detail, to collect costs in cost pools as