Classifying activities into these general categories facilitates product costing because
the costs of activities associated with the different levels respond to different types of
activity drivers. (Cost behavior differs by level.) Knowing the activity level is important
because it helps management identify the activity drivers that measure the amount of
each activity output being consumed by individual products. Activity-based costing systems
improve product costing accuracy by recognizing that many of the so-called fixed
overhead costs vary in proportion to changes other than production volume. Level classification
also provides insights concerning the root causes of activities and thus can
help managers in their efforts to improve activity performance