The cost hierarchy is a classification system used in activity-based costing that designates activities based on how easily they can be traced to a product. In order of increasing order of traceability difficulty, the cost hierarchy is:
- Activities at the unit level. These involve activites performed on each unit produced. If a unit is not produced, then this type of activity should not occur.
- Activities at the batch level. These involve activities performed whenever a batch of units is processed. It does not matter how many units are in a batch, since the activities relate to the presence of a batch, not its size. Machine setup costs are considered to be at the batch level.
- Activities at the product level. These involve activities targeted at a specific product or product line, such as the cost to process an engineering change order.
- Activities at the facility level. These involve activities carried out for an entire facility. For example, the compensation cost of the materials management staff is considered to be at the facility level.
It is not always possible to assign costs to products, but the cost hierarchy at least provides a framework for which costs are most closely traceable to a product.