Cost hierarchies If any student has worked in a manufacturing plant (or if you have shown videos of a manufacturing process, ask the student to illustrate unit-output-level, batch-level, product- sustaining and facility-sustaining costs (and related cost drivers) in that context. Traditional cost accounting systems treated all costs as if they were unit-output-level costs. It can be difficult to identify drivers of higher-level costs, particularly facility-sustaining costs (e.g. what drives MD’s salary. It can be expensive to obtain data on values of higher-level cost drivers, as this information is not generally collected by the cost accounting system (e.g. batch- level drivers might include number of setups, number of purchase orders and number of engineering change orders. Decreasing information processing costs makes it less expensive to obtain data on nontraditional cost drivers and increased competition increases the benefits of accurate cost information. Hence, companies are adopting more complex systems that recognise the hierarchy of costs and cost drivers. Reducing consumption of a cost driver will not automatically reduce OH. For example, reducing the number of suppliers is unlikely to reduce material procurement costs substantially, unless management recognises that fewer suppliers means less work for purchasing agents and actively reduces the size of the purchasing department (through attrition, reassignment or layoffs. The method that management uses to reduce the size of the purchasing department will affect the extent to which employees cooperate with future cost reductions. If they are rewarded by layoffs, employees will hesitate to cooperate in the future.
