Activity Classification: Value, Cost, and Production

Classification of Activities

A) In Terms of Value Added

• Value-added activities: These activities enhance customer interest in the company's output (product or service).
• Non-value-added activities: These are activities that the customer does not perceive as valuable or that are not considered differentiating compared to the competition.

B) Based on Their Relationship with the Cost Objective (in Terms of Cost Causality)

• Activities related to production volume: These are activities whose costs depend critically on the volume (number of units) of production.
• Activities related to the organization of the production process (batch or order activities): These are activities whose costs are related to the number of processes at work in the company (e.g., activities carried out each time a production order is launched, such as machinery settings, movement of materials, preparation of materials, etc.). Thus, the cost of the activity "setting machines" varies depending on the number of lots processed but is independent of the number of units processed in each production order (lot).
• Activities in support of product lines: These are activities required to carry out the production and marketing of each product, maintain a customer base, sustain or increase market share, etc. Their costs can be attributed to a specific product range or product line but do not depend on the number of units produced or manufactured batches (e.g., changes in product design, R&D, etc.).
• Activities related to infrastructure: These are activities related to the maintenance of the company's infrastructure. Within this category are grouped activities whose costs can be classified as overhead since they are common or joint activities of various goods and not directly related to the production process. Therefore, their costs should be considered common to all products made with this infrastructure. For example, general management. Typically, the cost of these activities is not assigned to products, but is taken directly to results for the period, or is reassigned to the primary activities (at the unit level, batch, and product line).

The Role of Cost Drivers

Cost drivers are used to control and measure the consumption that each product makes in each of the activities necessary to achieve its production.

Once the aggregate costs of relevant activities are determined, the process of calculation and assessment requires the identification and allocation of the costs of each activity to each of the products manufactured.

To make this assignment, the notion of "cost driver" or cost generator is used:

• Each activity must have the most appropriate cost driver defined so that the amount of such activity that each product consumes can be measured.
• The unit cost for each generator can be quite varied, for example, units of time, weight, distance, surface, etc. (hours worked, number of miles traveled, order number, square meters of wallpaper, etc.), but must be readily identifiable in each product that has been the recipient of such activity.
• Thus, by dividing the total cost of an activity by the number of generators applied to the production cost, the unit cost of the generator can be obtained, and the implementation of each activity for each product can be assessed.