What is a Facility-Sustaining Activity?
A facility-sustaining activity is a type of overhead cost in the activity-based costing (ABC) methodology that is crucial for the operation and management of an entire facility. These activities are necessary for the overall operations of an organization but cannot be directly tied to a particular product or service offered by the organization. Common examples include:
- Security: Ensuring the safety of the premises.
- Safety: Maintaining safety standards and protocols within the facility.
- Maintenance: Upkeeping the physical plant, machinery, and equipment.
- Plant Management: Overseeing the complete functioning of the facility.
Examples of Facility-Sustaining Activities
- Security Services: Employing security personnel and installing security systems to prevent theft and unauthorized access.
- Safety Protocols: Implementing safety measures, such as fire drills, emergency exits, and workplace hazard assessments.
- Routine Maintenance: Regular servicing of HVAC systems, lighting, plumbing, and other essential services.
- Plant Management: Supervising operations to ensure that the facility complies with regulations and operates efficiently.
Frequently Asked Questions
Q: Why can’t facility-sustaining activities be associated with specific products?
A: Facility-sustaining activities are general overhead costs that benefit the organization as a whole, rather than any specific product. These activities are necessary to keep the facility operationally efficient and secure but do not vary directly with production volumes.
Q: How are facility-sustaining activities treated in activity-based costing?
A: In activity-based costing, facility-sustaining costs are allocated to cost pools and then distributed among products or services based on a rational and consistent method, often using relevant cost drivers such as machine hours, floor space, or headcount.
Q: What distinguishes facility-sustaining activities from product-sustaining activities?
A: Facility-sustaining activities support the entire organization, lacking a direct connection to individual products. Product-sustaining activities, on the other hand, pertain specifically to maintaining or improving a particular product or group of products.
Activity-Based Costing (ABC): A costing methodology that assigns costs to products or services based on the activities they require.
Overhead Costs: Expenses that are not directly tied to the production but are necessary for operating a business, such as utilities and administrative salaries.
Cost Pools: Groupings of individual costs, typically by department or service, that are allocated to cost objects using cost drivers.
Cost Drivers: Factors that cause changes in the cost of an activity, used to allocate overhead costs in ABC.
Online References
- Investopedia on Activity-Based Costing
- Corporate Finance Institute: Overhead Cost Definition
- American Institute of CPAs on Cost Drivers
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
- “Activity-Based Costing and Activity-Based Management for Health Care” by Judith J. Baker
Accounting Basics: “Facility-Sustaining Activity” Fundamentals Quiz
### Which activity would be considered facility-sustaining in a manufacturing plant?
- [ ] Fabrication line assembly
- [x] Security services
- [ ] Raw material procurement
- [ ] Product packaging procedures
> **Explanation:** Security services are necessary for the entire organization but not directly linked to any specific product, making it facility-sustaining.
### What is true about facility-sustaining activities in the context of activity-based costing?
- [ ] They can be easily linked to specific products.
- [x] They benefit the entire organization.
- [ ] They are always variable costs.
- [ ] They are exclusively related to production processes.
> **Explanation:** Facility-sustaining activities are general overhead costs that benefit the entire organization, not specific products.
### In activity-based costing, how are facility-sustaining activities treated?
- [ ] Allocated directly to products
- [ ] Treated as direct costs
- [x] Allocated to cost pools
- [ ] Ignored in cost calculations
> **Explanation:** Facility-sustaining costs are allocated to cost pools and then distributed among products or services based on a rational method.
### What distinguishes facility-sustaining activities from product-sustaining activities?
- [x] Facility-sustaining activities support the entire organization.
- [ ] Facility-sustaining activities are unique to each product.
- [ ] Both are directly tied to production volumes.
- [ ] Both can be traced to individual products.
> **Explanation:** Facility-sustaining activities support the entire organization, lacking a direct connection to individual products, unlike product-sustaining activities.
### Which is NOT an example of a facility-sustaining activity?
- [ ] Plant management
- [x] Customizing machinery for a particular product
- [ ] Routine maintenance
- [ ] Workplace safety drills
> **Explanation:** Customizing machinery for a specific product is a product-sustaining activity, not a facility-sustaining one.
### How are facility-sustaining activities classified in financial statements?
- [ ] Direct costs
- [ ] Inventory assets
- [x] Overhead costs
- [ ] Revenue-generating costs
> **Explanation:** Facility-sustaining activities are classified as overhead costs, which are necessary but not directly tied to product generation.
### What kind of cost drivers are typically used for allocating facility-sustaining costs?
- [ ] Direct labor hours
- [x] Floor space or machine hours
- [ ] Unit production volume
- [ ] Sales revenue
> **Explanation:** Cost drivers like floor space or machine hours are often used to allocate facility-sustaining costs in activity-based costing.
### Why might it be challenging to allocate facility-sustaining costs to specific products?
- [x] These costs benefit the entire facility
- [ ] They are variable and fluctuate with production volumes
- [ ] They are directly linked to sales
- [ ] They change with market conditions
> **Explanation:** Facility-sustaining costs benefit the entire facility, making it challenging to allocate them to specific products.
### What is a common practice for managing facility-sustaining overheads?
- [ ] Reducing direct labor
- [x] Grouping costs in cost pools
- [ ] Investing in direct materials
- [ ] Cutting product line activities
> **Explanation:** A common practice is to group overhead costs into cost pools and then allocate them based on suitable cost drivers.
### Which department most likely incurs facility-sustaining costs?
- [x] Plant management
- [ ] Direct production
- [ ] Sales
- [ ] Research and development
> **Explanation:** Plant management incurs many of the necessary costs to sustain the facility, such as maintenance and safety.
Thank you for exploring the nuances of facility-sustaining activities with this comprehensive guide and associated quizzes. Keep enhancing your command of financial concepts and accounting practices!
