Which of the following is the proper classification of the two activities listed?

Try the new Google Books

Check out the new look and enjoy easier access to your favorite features

There is no special difficulty classifying units mainly engaged in the production of goods or services on a contract, commission or fee for service basis for other units. However, difficulties arise in determining the major activity of units which have goods or services produced for them on a contract, commission or fee for service basis, where these goods or services are included in the final output of the unit.

Units that arrange the manufacture of their products by another unit, paying the sub-contracted unit a commission, are referred to internationally as 'converters'. The treatment of converters was a significant boundary issue in the development of ANZSIC 2006, because decisions made regarding the treatment of their activity affect the scope of the manufacturing, wholesale and retail divisions. The treatment of converters has been clarified in the definitions of these divisions for ANZSIC 2006.

Historically, these units have been classified to the manufacturing division, because the businesses concerned often previously manufactured the goods themselves. They have since, for various reasons, sub-contracted out the manufacturing activity to other units, either in the same country or abroad.

While converters do not physically manufacture the goods, they often own the inputs to the manufacturing process, the copyright to the design of the goods, bear the commercial responsibility and risk for the goods produced, and exert significant control over the production process.

ISIC currently classifies these units to manufacturing, provided they exert some control over the design of the goods or the manufacturing process. ISIC Rev. 3.1 specifically states that ownership of the material inputs is required for a converter to be classified to the manufacturing division:

Units which sell goods or services under their own name, and for their risk, but have the actual production done by others, are to be classified as if they produce the goods or services themselves, provided that they have considerable influence on the conception of the products or, in the case of the manufacturing industry, they own the materials to be transformed.

For ANZSIC 2006, a pragmatic approach has been taken for the treatment of converters, along the lines of the existing treatment in ISIC Rev. 3.1. Converters of manufactured goods are classified as follows:

• units that own the material inputs and own the final outputs, but have the production done by others, are classified to the manufacturing division; and
• units that do not own the material inputs, but own the final outputs and have the production done by others, are not classified to the manufacturing division. They are classified either as a wholesaler or a retailer.

Units which undertake manufacturing for other units on commission are classified to the manufacturing division. The majority are classified to the industry class which includes the manufacturing activity they undertake. The only exceptions are:

• where the sub-contracted unit manufactures the goods as part of an overall production process, the sub-contractor will be classified to the same industry as the converter. For example, car manufacturing is considered one activity although it includes sub-activities such as casting, forging, welding, assembling, painting, etc. If the sub-contracted unit manufactures a specific part (such as engines or gear boxes) as an integral part of the car manufacturing, the sub-contracted unit is classified under car manufacturing; and
• where the sub-contracted unit manufactures a variety of goods and the predominance of particular goods cannot be established, the sub-contractor will be classified to the relevant manufacturing n.e.c. class.

In some cases very different outcomes can result from the two methods. For example, a unit undertakes activities which are primary to three classes where:

• 40% of its income is derived from activities of wholesaling motor vehicles;
• 35% of its income is derived from retailing motor vehicles; and
• 25% of its income is derived from retailing motor vehicle parts.

Using the 'top-down' method.

Step 1 Determine the division to which the unit belongs.

In this case the unit would be classified to Division G Retail Trade, as this is the Division where most activity occurs (i.e. 60% of the unit's income is derived from its retail activities, compared with 40% from wholesale activities).

Step 2 Determine the subdivision to which the unit belongs.

In this case the unit would be classified to Subdivision 39 Motor Vehicle and Motor Vehicle Parts Retailing, as both retail activities belong to this subdivision.

Step 3 Determine the group to which the unit belongs.

In this case the unit would be classified to Group 391 Motor Vehicle Retailing, as the income derived from retailing motor vehicles is greater than that derived from retailing motor vehicle parts.

Step 4 Determine the class to which the unit belongs.

In this case the unit would be classified to Class 3911 Car Retailing, as the car retailing activity is predominant.

Using the direct method, the unit would be classified according to the largest single activity undertaken. Therefore, based on the fact that the largest single income - earning activity of the unit is derived from wholesaling motor vehicles, the unit would be classified to Class 3501 Car Wholesaling. This example illustrates how different classification outcomes can result from the use of either the top-down or the direct method of classification.

The top-down method of classification is the preferred method of the ABS, Statistics NZ and ISIC.

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

• Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. 
• The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.
• An activity is a cost driver, such as purchase orders or machine setups. 
• The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. 

ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

1. Identify all the activities required to create the product. 
2. Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.
3. Assign each cost pool activity cost drivers, such as hours or units. 
4. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. 
5. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. 
6. Multiply the cost driver rate by the number of cost drivers. 

As an activity-based costing example, consider Company ABC that has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked, which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10.

Activity-based costing benefits the costing process by expanding the number of cost pools that can be used to analyze overhead costs and by making indirect costs traceable to certain activities. 

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involves counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity.

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. 

Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. 

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation, utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.