Which type of activity in the Activity Based Costing system does the use of indirect materials/consumables fall into?

In Activity Based Costing (ABC), the classification of activities helps organizations allocate costs more accurately based on the actual consumption of resources. The use of indirect materials and consumables typically falls under unit-level activities.

Unit-level activities are those that are performed each time a unit of product is produced. This means that as production increases, the costs associated with unit-level activities, such as indirect materials, also increase proportionally. For instance, every individual unit produced may require a certain amount of indirect materials like lubricants or cleaning agents, making the costs directly tied to the number of units produced.

Understanding that these consumables support the direct production of each unit is crucial in determining how costs are assigned in an organization. This allows companies to get a clearer picture of their cost structure and enable better decision-making regarding pricing and production processes.

In contrast, batch-level activities pertain to costs incurred for a group of units, product-level activities are incurred to support specific products regardless of the number of units produced, and facility-level activities are necessary for sustaining the business as a whole and are not tied to individual products or batches. This classification ensures a nuanced understanding of cost drivers and ultimately aids in more effective financial management and operational efficiency.