What does Multilevel Categorization let you do, and why does each level depend on the one above?

Classify and report by up to 4 levels; the schema is configured by an admin in the Web Client UI.

Because it's configured by schema (not standard table values), each level depends on the previous — e.g. L1 = Incident → L2 = incident type. SAP provides a standard schema; you can map legacy-system key fields in for reporting.