Western Governors University (WGU) ACCT3314 D101 Cost and Managerial Accounting Practice Exam

The cost of electricity to operate machines in a factory is categorized as a unit activity in Activity-Based Costing (ABC). Unit activities are those costs that are incurred each time a unit of product is produced. Since the electricity is necessary for the operation of machines as they produce products, it directly ties to the volume of production. Therefore, the more units that are produced, the more electricity is consumed, making it a cost that varies directly with production levels.

In ABC, it is essential to identify how costs behave with respect to production to accurately allocate costs to products. Recognizing electricity as a unit activity helps ensure that the overhead costs are appropriately assigned based on actual production levels, leading to more precise product costing and profitability analysis. This understanding aids in effective decision-making about pricing, production levels, and operational efficiencies.