Lim,%2014%

Lesson 3: Activity Based Costing

ABC problems are kind of mechanical and tedious, but that really is the nature of these topics. We want

aspects
and
systemsEnjoy!
in service
ch as banks andto drill theExplain
conceptwhich
of costs
into youofsocost
that information
it will come out
naturally.
organizations would particularly interest a regulator, and why these
ard costing
Warm-Up
features would be of interest.
(6 marks)
eting and control
CIMA Stage
4 Management
Systems
nizations. But this 1) What are the fundamental
differences
betweenAccounting
a traditional Control
and an ABC
system?
are now revising

2) Describe the circumstances when traditional costing systems are likely to report distorted costs.

11.20 Intermediate: Comparison of traditional product costing with

ce organizations
approaches to the
(6 marks)
ns may create
costing.
(4 marks)
rmation in service
(4 marks)
time state-owned,
countries include
hey are often
ices by an
, and are designed
n industries where
e market.

3) Explain how low volume products can be undercosted and high volume products overcosted when
ABC. Having attended a CIMA course on activity-based costing (ABC)
traditional costing systems are used.

you decide to experiment by applying the principles of ABC to the

4) Having
attended currently
a CIMA course
activity-based
costing
(ABC) you
decide to experiment by
four products
madeonand
sold by your
company.
Details
applying
the
principles
of
ABC
to
the
four
products
currently
made
and
sold by your company.
of the four products and relevant information are given below for
Details of the four products and relevant information are given below for one period:
one period:
Product

Output in units
120
100
80
Costs per unit:
()
()
()
272
CHAPTER 11 ACTIVITY-BASED COSTING
material 11 ACTIVITY-BASED
40
50
30
272 DirectCHAPTER
COSTING
Direct labour
28
21
14
The production
overhead
absorbed
Machine
hours (per
unit) is currently
4
3 by using2a

120
()
60
21
3 The remaining $80 000 of overhea

000 and
of overhead
The
production
overhead
by using
a
different$80
factors
activitiescosts
tha
machine
hour rate,
and is
thecurrently
total of absorbed
the production
overhead
for theThe remaining
The four
products
arethe
similar
and
are production
usually produced
in production
runs
of 20 units
andand
soldactivities
in
different
factors
that are
m
machine
hour
rate,
and
total
of
the
overhead
for
the
to
be
attributed
to
products
on
th
period
has
been
analyzed
as
follows:
batches
of 10
units.
The
production
overhead
is currently
absorbed
by using
a machine
hour
rate,
The
products
are
similar
are usually
produced
in production
to be
attributed
to products
on the basis
period
hasfour
been
analyzed
as
follows:and
and
theoftotal
the production
overhead
forof
the
period
has been
Required:
() analyzed as follows:
runs
20 ofunits
and sold in
batches
10
units.
Required:
()
(a) Calculate the production o
Machine department costs (rent, business
(a) Calculate the production overhea
product unit using an acti
Machine department costs (rent, business
product unit using an activity bas
rates, depreciation and supervision)
10 430
(b) Explain how W has applied
rates, depreciation and supervision)
10 430
(b) Explain how W has applied Pareto
Set-up costs
5 250
its cost drivers and how it
Set-up costs
5 250
its cost drivers and how it may co
Stores receiving
3 600
Analysis to control its prod
Stores receiving
3 600
Analysis to control its production
Inspection/Quality control
2 100
Inspection/Quality control
2 100
C
Materials handling and dispatch
4 620
CIMA P2
Materials handling and dispatch
4 620

You
that
thethe
cost
drivers
to beto
used
as are
listed
for the11.22
overhead
costs
Advanced:
Computation o
Youhave
haveascertained
ascertained
that
cost
drivers
be are
used
asbelow
listed11.22
Advanced: Computation of ABC p
Youshown
have ascertained that the cost drivers to be used are as listed
accountancy
services
hasdiffe
thr
below
foroverhead
the overhead
shown:
accountancy
services
and hasand
three
below
for the
costscosts
shown:
limited
companies,
self
employed
limited companies, self employed individ
Cost driver
Cost Cost
Cost driver
individuals
requiring
individuals
requiring
taxationtaxation
advice. advi
XY
a
fee
by
adding
a
20%
mark-up
to
a
fee
by
adding
a
20%
mark-up
to
total
co
Setcosts
up costs
Number
of production
Set up
Number
of production
runs runs
attributed
to
each
client
based
on
attributed
to
each
client
based
on
the
ho
Stores
receiving
Requisitions
Stores
receiving
Requisitions
raisedraised
accounts
and providing
accounts
and providing
advice.advice.
Inspection/Quality
control
Number
of production
Inspection/Quality
control
Number
of production
runs runs
XY
is
considering
changing
to
XY is considering changing
to an acti
Materials
handling
and despatch OrdersOrders
executed
Materials
handling
and despatch
executed
The annual
costs
the causes
The annual
costs and
theand
causes
of thes
as
follows:
The
number
of
requisitions
raised
on
the
stores
was
20
for
each
as follows:
The number of requisitions raised on the stores was 20 for each
The number of requisitions raised on the stores was 20 for each product and the number of orders
product
andnumber
the number
of orders
executed
was
42, each being
order being
product
and the
orders
executed
was 42,
each
executed
was 42, eachoforder
being
for a batch
of 10
of a order
product.
for
a
batch
of
10
of
a
product.
for a batch of 10 of a product.
Accounts
preparation
an
Yourequired:
are required:
Accounts
preparation
and advice
You are
Requesting
infor
Requesting
missingmissing
information
to calculate
the total
for product
each product
if all overhead
(a) to(a)
calculate
the total
costscosts
for each
if all overhead
Issuing
fee
payment
rem
Issuing
fee
payment
reminders
are absorbed
on a machine
hour basis;(4 marks)
(4 marks)
costscosts
are absorbed
on a machine
hour basis;
1%
client meetings
HoldingHolding
client meetings
to calculate
the total
for product,
each product,
(b) to(b)
calculate
the total
costscosts
for each
using using
Travelling
to clients
Travelling
to
clients
activity-based
costing;
(7 marks)
activity-based
costing;
(7 marks)

for a (a)
batch
10 of a product.
to of
calculate
the total costs for each product if all overhead
You are required:
costs are absorbed on a machine hour basis;
(4 marks)

Requesting missing informa

fee and
payment
Accounts Issuing
preparation
adviceremind
Holding
client
meetings
Requesting missing information
Lim,%2014%
Travelling
clients
Issuing fee
payment to
reminders

(b)totocalculate
calculate
total
costs
for each
product,
using
(a)
thethe
total
costs
for each
product
if all overhead
activity-based
costing;
(7 marks)
costs
are absorbed
on a machine hour basis;
(4 marks)
Holding client meetings
(b)
theand
totallist
costs
each
product,
using
(c)totocalculate
calculate
thefor
unit
product
costs
from your figures
The
following
details relate to three
Travelling
to clients
activity-based
(7 marks)
in (a) and (b)costing;
above, to show the differences and
to comment
whole:
tobriefly
calculate
and
the unit product
fromdrawn
your figures
You(c)
are
required
to:list
on any
conclusions
which costs
may be
which couldThe following details relate to three of XYs clien
in (a) and (b) above, to show the differences and to comment
whole:
have pricing and profit implications.
(4 marks)
briefly on
conclusions
may be drawn
which could
a) to calculate
theany
total
costs for which
each product
if all overhead
costs are absorbed on a machine
Client A
Accounting
have pricing and profit implications.CIMA Stage 2 Cost
(4 marks)
hour basis
B
(b) to calculate the total costs for each
product,
costing; Hours spent on preparing A
CIMA
Stage 2using
Cost activity-based
Accounting
(c) to calculate and list the unit product costs from your figures in (a) and (b) above,
to show
and the
providing advice
10
Hours spentaccounts
on preparing
11.21 Advanced:
ABC overhead
calculation.
W is awhich
manufacturing
differences
and to comment
briefly on
any conclusions
may be drawn which
could
have
Requests
for
missing
information
accounts
and
providing
advice
1
000
250
company
produces
three calculation.
products: X,WYisand
Z. Each uses the
11.21
Advanced:
ABC
overhead
a manufacturing
pricing
andthat
profit
implications.
Payment
reminders
sent
for missing
information
4
10
company
that produces
products:
X, Y and as
Z. Each
uses
the table Requests
same resources,
but three
in different
quantities
shown
in the
of
Payment Client
reminders
sent held
2
8
meetings
same
but 2010
incompany
different
quantities
as shown
the table X,
of Y and Z. Each uses the same
5) W
is a resources,
manufacturing
that produces
threeinproducts:
budgeted
data for
below:
Client meetings
held
4
11
Miles
travelled
to
meet
clients
resources,
but for
in different
quantities as shown in the table of budgeted data for 2010 below:
budgeted data
2010 below:
Miles travelled to meet clients

Product

Product

Budgetedproduction
production
Budgeted
Directlabour
labourhours
hours
Direct
perper
unitunit
Machinehours
hours
Machine
perper
unitunit
Batchsize
size
Batch
Machine
perper
batch
Machinesetups
setups
batch
Purchase
perper
batch
Purchaseorders
orders
batch
Material
movements
per
batch
Material movements per
batch

150

600

Required:

15001500 2500 2500 4000

2
4
2
4
3
3
2
3
2
3
50 50 100 100 500
2
3
1
2
3
4
4
6
4
4
10 10
5
4
5

Z Required:
Prepare calculations to show the effe
Prepare calculations to show the effect on fees c
these
three
to th
4000
these three
clients
of clients
changingoftochanging
the new costin
3
CIM
3
CIMA P2 Perform
500
1
11.23 Advanced:
TraditionalTraditional
and ABC profitabili
11.23 Advanced:
and AB
6
Abkaber Abkaber
plc assembles
three typesthree
of motorcycle
plc assembles
types o
4
factory: the
50cc
Sunshine;
the
250cc
Roadster
factory: the 50cc Sunshine; the 250

Fireball. It sells the motorcycles throughout the w

Fireball. It sells the motorcycles thro
Ws budgeted
budgeted production
overhead
costs
forfor
2010
are
$400
000
to market
pressures
Ws
production
overhead
costs
2010
are
$400
000
and
current
practice
is toAbkaber
absorbplc has invested he
Ws budgeted production overhead costs for 2010 are $400 000
to market
pressures
Abkaber plc has
and current
practice
is to costs
absorb
theseancosts
into product
costs on directmanufacturing
in recent years and, as
these
costs into
product
using
absorption
rate based
labour hours.technology
As a result
and
current
practice
is
to
absorb
these
costs
into
product
costs
manufacturing
in recent y
using
an absorption
rate based
on direct labour
hours.
As aunit
result
significantly
reduced the technology
size of its workforce.
the
production
overhead
cost attributed
to each
product
is:
using
an absorption
on direct
labour
hours.
As a result Historically,
significantly
reduced
the
size
ofall
itsovw
the
production
overheadrate
costbased
attributed
to each
product
unit is:
the company has allocated
the
production
overhead
cost
attributed
to
each
product
unit
is:
Historically,
theiscompany
has allo
Product X $32
Product Y $64
Product Z $48
total direct labour
hours, but
now considering
Product X $32 Product Y
$64 Product Z $48
total
direct
labour
hours,
but
is
now
activity-based
costing
(ABC).
Abkaber
plcs
accou
Product
X $32ofofS
Product
Y
$64changing
Product
$48
The
management
to to
anZan
activity
based
The
management
Sare
areconsidering
consideringchanging
activity
based method
ofactivity-based
attributing
produced
the
following analysis.
costing (ABC). Abkabe
overhead
to products
as a to
result
haveand
identified
the following
and related
method
ofcosts
attributing
costs
products
as an
a result
The management
ofoverhead
S areand
considering
changing
to
activity
based cost drivers
produced the following analysis.
cost
pools:
have
identified
the
following
cost
drivers
and
related
cost
pools:
Annual
method of attributing overhead costs to products and as a result
Sellin
Direct
Annual
have identified the following cost drivers and related cost pools:
Annual
Labour
Price
Output
Cost pool
$
Cost driver
Direct
Annual
( per u
Hours
(units)
Labour
Output
Cost pool
Costhours
driver
Machine
maintenance
100 000$
machine
Hours
(units)
Sunshine
2000
200
000
4000
Machine setups
70 000
machine setups
Machine
maintenance
100
000
machine
hours
Roadster
1600
220
000
6000
Purchasing
90 000
purchase orders
Sunshine
2000
200
000
Fireball
400
80
000
8000
Machinehandling
setups
70 000 material
machine
setups
Material
60 000
movements

Purchasing

90 000

purchase orders

Roadster

1600

The remaining $80 000 of overhead costs are caused by a number of differentFireball
factors and
400
Material handling
60 000
material movements
activities that are mainly labour related and are to be attributed to products on the basis of labour
hours.
Required:
(a) Calculate the production overhead cost attributed to each product unit using an activity-based
approach.
(b) Explain how W has applied Pareto Analysis when determining its cost drivers and how it may
continue to use Pareto Analysis to control its production costs

2%

220 000
80 000

its cost drivers and how it may continue to use Pareto

3 600
Analysis to control its production costs.
(3 marks)
Computation
product
costs.
XY provides
e as
11.22 Advanced:
ComputationofofABC
ABC product
costs.
XY provides
2 100
s
to belisted
used
are as 11.22
listed Advanced:
CIMA
P2
Performance
Management
accountancy
services
and
has
three
different
categories
of
client:
4 620 accountancy
services and has three different categories of client:
limited companies, self employed individuals, and employed
limited
companies,
self employed individuals, and employed
Lim,%2014%
st driver
individuals
requiring
taxation advice.
XY product
currentlycosts.
charges
clients
11.22
Advanced:
Computation
of ABC
XYits
provides
o be used are as listed
individuals
requiring
taxation
advice.
XYcosts.
currently
charges
its
a fee
by adding
a 20%and
mark-up
to total
Currently
theofcosts
are clients
accountancy
services
has
three
different
categories
client:
mber of production runs
attributed
to20%
each mark-up
client
based
on
the hours
spent
on preparing
a
fee
by
adding
a
to
total
costs.
Currently
the
costs are
limited
companies,
self
employed
individuals,
and
employed
quisitions
6) XY
provides
accountancy
services and has three different categories of client: limited companies,
tion
runsraised
driver
accounts
and
providing
advice.
individuals
requiring
taxation
advice.
XY
currently
charges
its
clients
attributed
each client
based on
the
hours spent
on preparing
selfto
employed
individuals,
and
individuals
requiring taxation advice. XY currently
dmber of production runs
considering
to total
anemployed
activity
costing
system.
a feeXY
by is
adding
a 20% changing
mark-up to
costs.based
Currently
the costs
are
dersofexecuted
accounts
and
providing
advice.
ber
production runs
charges
its costs
clients
a the
fee causes
by adding
a 20%
mark-up
toanalyzed
total costs. Currently the costs are attributed
The
annual
and
of
these
costs
have
been
attributed to each client based on the hours spent on preparing
tion
runs
isitions
raised
toasconsidering
each
client based
on theto
hours spent on preparing accounts and providing advice.
changing
follows:
stores
was
20 for each XY is
accounts
and providing
advice. an activity based costing system.
ber
of
production
runs
was 42, each order The
beingannualXYcosts
and thechanging
causestoofanthese
been
analyzed
is considering
activitycosts
based have
costing
system.
$
rs executed
XY
is
considering
changing
toofan
activity
based
costing
system. The annual costs and the causes of
The
annual
costs
and
the
causes
these
costs
have
been
analyzed
as follows:
or each
these
costs have been analyzed as follows: 580 000
as follows:Accounts preparation and advice
res was 20 for each
rder being
Requesting missing information
30 000$
asproduct
42, each
order
being
h
if all
overhead
$
Issuing
fee
payment
reminders
15
000
hour basis;
(4 marks)
Holding
client
meetings
60
000
h product, using
Accounts
preparationand
and advice
advice
580580
000000
Accounts
preparation
Travelling to clients
40 000
(7 marks)
Requesting
missing
information
30
000
Requesting missing information
30 000
product if all overhead
overhead
ct costs from your figures
Issuing
fee
payment
reminders
15
000
The
following
details
relate
to
three
of
XYs
clients
and
to XY as a
ur basis;
(4 marks)
Issuing
fee
payment
reminders
15
000
ferences
and to comment
(4 marks)
60 000
whole: Holding client meetings
product,
using
ay be drawn which could
Holding
client tomeetings
60 000
Travelling
clients
Client 40 000
(7(4marks)
.
marks)
Travelling
to
clients
40
000XY
costs
from your figures
A XYs clients
B
C to XY as
(7 marks)
The following details relate to three of
and
a
Aences
Stage and
2 Cost
Accounting
whole:
ur figuresto comment
The following
details
relaterelate
to three
of XYs
clients
and
to to
XYXY
asasaa whole:
Hours
spent
on preparing
be drawn which could
The
following
details
to three
of XYs
clients
and
Client
comment
accounts and providing advice
1 000
250
340
18 000
whole:
on.
W is a manufacturing
(4 marks)
Requests for missing information
250
A 4
B10
C6
XY
ich
could
Y and
Each
uses the
tage
2 Z.
Cost
Accounting
Payment reminders sent
2
8
10
400
Client
s (4
as marks)
shown in the table of

Clientspent
meetings
held
4
1
2
250
Hours
on preparing
A
B
C 10
XY
Miles
travelled
to
meet clients
150
600
0
000
accounts
and
providing
advice
1
000
250
340
18
000
. W is a manufacturing
Accounting
Requests for missing information
4
10
6
250
and Z. Each uses the
Required:
Hours
spent
on
preparing
V
Z
Payment
reminders
sent
2
8
10
400
s shown in the table of
Prepare
calculations
to show the 1effect
each250
of 18 000
Client
meetings
held advice
4 on fees
1charged2to
accounts
and
providing
000
250
340
ufacturing
thesetravelled
three clients
of clients
changing to the
2500
4000
Miles
to meet
150new costing
600 system.
0
10 000
Requests
for missing information
4
10
6
250
(10 marks)
uses the 4
3
Payment
reminders
sent
2
8
10
400
Required:
CIMA P2 Performance Management
2
V of
Z 3
e table
Required:
Client
held
1
2 of 250
100
500 meetings
Prepare calculations
to show the effect4on fees charged
to each
Prepare calculations to show the effect on fees charged to each of these three clients of changing
1 travelled
these
three
clientsclients
of changingand
to ABC
the
new
costing
system.
2500 3
4000
Miles
to
meet
150
600
0
10 000
11.23
Advanced:
Traditional
profitability
analysis.
to the new costing system.
(10 marks)
44
36
Abkaber plc assembles three types of motorcycle at the same
Performance
Management
25
34
Required:
factory: the 50cc Sunshine; the CIMA
250ccP2
Roadster
and the
1000cc

7) Abkaber plc assembles three types of motorcycle at the same factory: the 50cc Sunshine; the

Z
100
500
Fireball. It sells the motorcycles throughout the world. In response
250cc
Roadstertoand
the 1000cc
Fireball.
It sells
the motorcycles
Prepare
calculations
show
the
effect
on fees
charged
to each ofthroughout the world. In
or 2010 3
are $400 000
1
to market
pressures
Abkaber and
plc has
invested
heavily
in new
11.23
Advanced:
Traditional
ABC
profitability
analysis.
response
to
market
pressures
Abkaber
plc
has
invested
heavily in new manufacturing technology
these
three
clients
of
changing
to the
new
costing
system.
4000
sts into
product
costs
4
6
manufacturing
technology
in recent
years
and,
as aatresult,
has
Abkaber
plcyears
assembles
three
types has
of
motorcycle
thereduced
same
in
recent
and,
as
a
result,
significantly
the size of its workforce.
abour hours.
53 As a result
4
significantly
reduced
the sizethe
of 250cc
its workforce.
(10 marks)
factory:
the 50cc
Sunshine;
Roadster and the 1000cc
each product unit is:
Historically,
themotorcycles
company hasthroughout
allocated all
overheadIncosts
using
Fireball.
It sellsthe
the
the
response
CIMA
P2 Performance
Management
3
Historically,
company
has
allocated
allworld.
overhead
costs using total direct labour hours, but is
total
direct
labour
hours,
but
is
now
considering
introducing
2010
$400 000
duct
Z are
$48
to market
pressuresintroducing
Abkaber plc has
invested heavily
in new
now
considering
activity-based
costing
500
activity-based
costing (ABC). Abkaber
plcs accountant
has (ABC). Abkaber plcs accountant has
snging
into product
costs
manufacturing
technology
in
recent
years
and,
as
a
result,
has
produced
the
following
analysis.
to an1activity based
produced the following analysis.
our
hours.
As
a
result
significantly
reduced
the
size
of
its
workforce.
11.23
Advanced:
Traditional
and
ABC
profitability
analysis.
oducts and as a result
6cost
ach
product
unitpools:
is:
Historically,
the company
has allocated
all overhead
using
nd related
Abkaber plc
assembles
three types
of motorcycle
at costs
theRaw
same
Annual
total direct labour
hours, but Direct
is now considering
introducing
ct Z $484
Selling
material
Annual
factory: activity-based
the 50cc Sunshine;
theAbkaber
250ccplcs
Roadster
and
the 1000cc
costing
accountant
has cost
Price
Output(ABC). Labour
Costtodriver
ing
an activity based
Fireball.produced
It sellsthe
thefollowing
motorcycles
throughout
the world.
In response
( per unit)
Hours
( per unit)
(units) analysis.
ucts000
and as a resultto market pressures Abkaber plc has invested heavily in new
00
machine hours
related cost pools:
Raw
Annual
Sunshinetechnology
2000 in recent
200
000years and,
4000 as a result,
400
machine
costs setups manufacturing
has
Selling
Direct
material
Annual
Roadster
1600
220 000
6000
600
purchase
a resultorders significantly
reduced
the
size
of
its
workforce.
cost
Labour
Price
Output
ost
driver movements
Fireball
400
80 000
8000
900
material
nit is:
Historically, the (units)
company has
allocated
allunit)
overhead
costs
( per
Hours
( per
unit) using
achine hours
total direct labour hours, but is now considering introducing
Sunshine
2000
200 000
4000
400
achine setups
activity-based
costing
(ABC). Abkaber
plcs6000
accountant has
Roadster
1600
220 000
600
urchase orders
vity based
the following
Fireball
400analysis.
80 000
8000
900
aterial movements produced

a result
pools:

s
s

Sunshine
Roadster
Fireball

Annual
Output
(units)

Annual
Direct
Labour
Hours

Selling
Price
( per unit)

Raw
material
cost
( per unit)

2000
1600
400

200 000
220 000
80 000

4000
6000
8000

400
600
900

3%

Lim,%2014%
ASSESSMENT MATE
The three cost drivers that generate overheads are:
Deliveries to retailers the number of deliveries of motorcycles to
retail showrooms
Set-ups
the number of times the assembly line
process is re-set to accommodate a
production run of a different type of
motorcycle
Purchase orders
the number of purchase orders.
The annual cost driver volumes relating to each activity and for each
type of motorcycle are as follows:

Sunshine
Roadster
Fireball

Number of
deliveries
to retailers

Number of
set-ups

Number of
purchase
orders

100
80
70

35
40
25

400
300
100

The annual overhead costs relating to these activities are as follows:

11.24 Advanced: ABC profitability analysis. A hea

specialises in hip, knee and shoulder replacement
known as surgical procedures. As well as providing
procedures the company offers pre operation and
in-patient care, in a fully equipped hospital, for tho
will be undergoing the surgical procedures.
Surgeons are paid a fixed fee for each surgical
perform and an additional amount for any follow-up
Post procedure follow-up consultations are only un
are any complications in relation to the surgical pr
no additional fee charged to patients for any follow
All other staff are paid annual salaries.
The companys existing costing system uses a
rate, based on revenue, to charge the costs of sup
the procedures. Concern has been raised about th
procedure costs and the companys accountant ha
project to implement an activity-based costing (ABC
The project team has collected the following da
procedures.
Procedure information

Hip

Kne

Fee charged to patients

per procedure
$8000
$10 0
Deliveries to retailers
2 400 000
Number of procedures
Set-up costs
6 000 000
per annum
600
Purchase orders
3 600 000
Average time per procedure
2.0 hours 1.2 h
Number of procedures
Alldirect
direct labour
labour isis paid
The
company
holds
no no stocks. At
All
paidatat5
5per
perhour.
hour.
The
company
holds
board meeting
pera theatre
session there
2
stocks.
a board meeting
was someofconcern
over the costing. In-patient days per procedure
was
someAtconcern
over thethere
introduction
activity-based
3
introduction of activity-based costing.
Surgeons fee per procedure
$1200
$1
The finance
director
argued:
I very
selling the Fireball
is viablewith
but I am not
The finance
director
argued:
I verymuch
muchdoubt
doubt whether
whether selling
% of procedures
convinced
activity-based
costing
would
tellactivity-based
us any more than the use
of labour hours in
the Fireballthat
is viable
but I am not
convinced
that
complications
8%
assessing
the viability
of more
each product.
costing would
tell us any
than the use of labour hours in
Surgeons fee per follow
assessing the viability of each product.
up consultation
$300
$
The marketing
director
argued:
theprocess
processofofnegotiating
negotiating a major new contract with a
The marketing
director
argued:IIam
am in
in the
Cost of medical supplies
motorcycle
company
for the Sunshine
model. For
such a big order they will not pay our
a major newrental
contract
with a motorcycle
rental company
for the
$400
$
normal
prices
but
we
need
to
at
least
cover
our
incremental
costs. I am per
notprocedure
convinced that
Sunshine model. For such a big order they will not pay our normal
activity-based
costing
would
as it merely
averages
prices but we need
to at
least achieve
cover ourthis
incremental
costs.
I am notcosts for our entire production.
The project team has obtained the following inform
convinced that activity-based costing would achieve this as it merely
supportbeactivities.
The
managing
director
argued:
I
believe
that
activity-based
costing
would
an improvement but
averages costs for our entire production.
it still has its problems. For instance, if we carry out an activity many times surely we get better at
The managing director argued: I believe that activity-based
it, and costs fall rather than remain constant. Similarly, some costs are fixed and do not vary
costing would be an improvement but it still has its problems. For
Activity
Cost driver
either with labour hours or any other cost driver.
instance, if we carry out an activity many times surely we get better
at it, and costs fall rather than remain constant. Similarly, some
Theatre
preparation
for sameNumber of theatre
The chairman argued: I cannot see the problem. The overall profit for
the company
is the
costs
are which
fixed and
do notof
vary
either with
labour hours
or any
eachno
session
no
matter
method
allocating
overheads
we use.
It other
seems to make
difference to me. preparations
cost driver.
Operating theatre usage
Procedure time
The chairman argued: I cannot see the problem. The overall
Nursing and ancillary
In-patient
Required:
profit for the company is the same no matter which method of
services
days
allocating
overheads
weprofit
use. Iton
seems
no difference
to me.
Administration
(a)
Calculate
the total
each to
ofmake
Abkaber
plcs three
types of product
using each of the Sales revenue
Other overheads
Number of procedures
following
Required:methods to attribute overheads:

(i) the existing method based upon labour hours; and

(a) Calculate the total profit on each of Abkaber plcs three types
Required:
(ii) activity-based costing
of aproduct
of the of
following
methods
(b) Write
reportusing
to theeach
directors
Abkaber
plc, astoitsattribute
management accountant.
The
report
(a) Calculate
the
profit per procedure for each
should: overheads:
procedures, using the current basis for cha
(i) the existing method based upon labour hours; and
support activities to procedures.
(ii) activity-based costing.
(13 marks)
(b) Calculate the profit per procedure for each
procedures using activity-based
costing.
4%
(b) Write a report to the directors of Abkaber plc, as its
(c)
Discuss
the
ways
in
which
the
information
management accountant. The report should:
project team may be of benefit to the mana
(i) evaluate the labour hours and the activity-based costing
company.

ASSESSMENT MATERIAL

273

11.24 Advanced: ABC profitability analysis. A healthcare company

specialises in hip, knee and shoulder replacement operations,
Lim,%2014%
s of motorcycles to
known as surgical procedures. As well as providing these surgical
procedures the company offers pre operation and post operation
(i) evaluate the labour hours and the activity-based costing methods in the circumstances
e assembly line
in-patient
care, inplc;
a fully
equipped hospital, for those patients who
of Abkaber
andASSESSMENT
MATERIAL
273
ccommodate a
will be(ii)
undergoing
the
surgical
procedures.
examine the implications
of activity-based costing for Abkaber plc, and in so doing
ifferent type of
evaluateare
the paid
issuesa raised
by each
of thesurgical
directors.
Surgeons
fixed fee
for each
procedure they
11.24
Advanced:
ABC
profitability
analysis.
A
healthcare
company
s are:
perform and an additional amount for any follow-up consultations.
specialises
in hip,
knee and in
shoulder
replacement
operations,
orders.
Refer
your
calculations
requirement
(a)
where appropriate.
Post to
procedure
follow-up consultations
areabove
only undertaken
if there
ries of motorcycles to
known as surgical procedures. As well as providing these surgical
are
any complications
in relation
theknee
surgical
procedure.
There is operations, known as
procedures
thecompany
company specialises
offers
pre operation
and
post
ctivity and for each 8) A
healthcare
into
hip,
and operation
shoulder
replacement
the assembly line
no
additional
fee
charged
to
patients
for
any
follow
up
consultations.
in-patient
care,
in
a
fully
equipped
hospital,
for
those
patients
who
surgical procedures. As well as providing these surgical procedures the company offers pre
o accommodate a
will
undergoing
theoperation
surgical
procedures.
operation
and post
in-patient
care, in a fully equipped hospital, for those patients who
All be
other
staff
are
paid
annual
salaries.
a different type of
will
be
undergoing
the
surgical
procedures.
Surgeons
are
paid
a
fixed
fee
for
each
surgical
they overhead
Number of
The companys existing costing system procedure
uses a single
perform
and
an
additional
amount
for
any
follow-up
consultations.
purchase
rate, based on revenue, to charge the costs of support activities to
ase orders.
Surgeons
are paid
a fixed
fee for each
procedure
they perform and an additional amount
Post procedure
follow-up
consultations
aresurgical
only undertaken
if there
orders
theany
procedures.
Concern has been
raised about
the inaccuracy
of are only undertaken if
for
follow-up
consultations.
Post
procedure
follow-up
consultations
are
any
complications
in
relation
to
the
surgical
procedure.
There
is
h activity and for each
procedure
costs
and
the
companys
accountant
has
initiated
a
there
are anyfee
complications
in relation
the surgical
procedure. There is no additional fee
no additional
charged to patients
for anytofollow
up consultations.
400
project
implement
an activity-based
costing (ABC)
system.
charged
to patients
any
follow
up consultations.
All other
staff are paid annual salaries.
All
other staff
are paidfor
annual
salaries.
300 of
Number
The
existing
costing
system
uses
a singledata
overhead
Thecompanys
project team
has
collected
the
following
on each of the
The
companys
existingtocosting
system
a singleactivities
overhead
purchase
f
100
rate,
based on revenue,
charge the
costsuses
of support
to rate, based on revenue, to charge
procedures.

re:

orders

ties are 400

as follows:
300
100

the
costs of support
activities
to raised
the procedures.
Concern has
the procedures.
Concern
has been
about the inaccuracy
of been raised about the inaccuracy of
procedure
costsand
andthe
thecompanys
companys
accountant
has
initiated
a project to implement an activityprocedure
costs
accountant
has
initiated
a
Procedure information
Hip
Knee
Shoulder
based
(ABC)ansystem.
project costing
to implement
activity-based costing (ABC) system.
The project team has collected the following data on each of the

Feeproject
charged
to patients
The
team
has collected the following data on each of the procedures.
procedures.

0
ctivities are as follows:
0
0
000

pany
000 holds no
000 over the
ern

ompany
holdsselling
no
bt whether
oncern over the

activity-based
bour whether
hours inselling
doubt

hat activity-based
cess
of hours
negotiating
f labour
in

mpany for the

of negotiating
otprocess
pay our
normal
company for the
ntal costs. I am not
l not pay our normal
ve thiscosts.
as it Imerely
mental
am not

hieve this as it merely

activity-based
hat
its activity-based
problems. For
as its we
problems.
For
urely
get better
s surely we get better
Similarly, some
nt. Similarly, some
hours
ororany
our
hours
anyother
other

oblem.
The
overall
em.
The
overall
which
methodofof
ch
method
no differencetotome.
me.
oe difference

per procedure
$8000
$10 000
$6000
Procedure
information
Hip
Knee
Shoulder
Number of
procedures
per annum
600
800
400
Fee charged to patients
Average time per procedure
2.0 hours 1.2 hours 1.5 hours
per procedure
$8000
$10 000
$6000
Number
of
procedures
Number of procedures
perannum
theatre session
2 800
1
4
per
600
400
Average
timedays
per procedure
2.0 hours 1.2
In-patient
per procedure
3 hours 1.5 hours
2
1
Number
of procedures
Surgeons
fee per procedure
$1200
$1800
$1500
session
2
1
4
%per
of theatre
procedures
with
In-patient days per procedure
3
2
1
complications
8%$1800
5%
10%
Surgeons fee per procedure
$1200
$1500
Surgeons
fee
per
follow
% of procedures with
up consultation
$300
complications
8% $300
5% $300
10%
Surgeons
fee per follow
Cost of medical
supplies
up
consultation
$300 $400 $300 $200
$300
per
procedure
$300
Cost of medical supplies
per procedure

thods to attribute

abour hours; and

ur hours; (13
andmarks)

ber plc, as(13

its marks)

$200

$300

support activities.

Activity
Activity

Cost driver
Cost driver

Theatre preparation for

Overheads
$000

Overheads
$000

Number of theatre

Theatre preparation for

Number of theatre
eachsession
session
preparations
each
preparations
Operating
theatre
usageProcedure
Procedure
Operating
theatre
usage
time time
Nursing
ancillary
Nursingand
and
ancillary In-patient
In-patient
services
days days
services
Administration
Sales
revenue
Administration
Sales
revenue
Other overheads
Number of procedures

Other overheads

kaber plcs three types

er
plcs three
types
methods
to attribute

$400

The project team has obtained the following information about the
support
activities.
The
project
thethe
following
information
about about
the
The
projectteam
teamhas
hasobtained
obtained
following
information
the support activities.

864
1449

864
1449

5428
1216
923

5428
1216
923

Number of procedures

Required:

Required:
(a) Calculate the profit per procedure for each of the three
the current
basis for charging
the of
costs
(a)procedures,
Calculateusing
the profit
per procedure
for each
theofthree
support
activities
to
procedures.
(5
marks)
procedures, using the current basis for charging the costs of
(b) Calculate the profit per procedure for each of the three
support activities to procedures.
(5 marks)
procedures using activity-based costing.

(13 marks)

5%

1 500 000

of
200 000

mile
12 000

tts

ch)

120
30 000

(c) Some categorizations of cost drivers provide hierarchical

models:
(i)
(ii)
(iii)
(iv)

unit-level activities,
batch activities,
product sustaining activities,
facility sustaining activities.

Lim,%2014%

Other analyses focus on value adding and non-value adding

Required:
activities.

24 000

r Order Number 377,

nto sections for each of
evel where appropriate.

costs; and
erall level) costs.

(5 marks)
ness of the cost driven of
levels (i) to (iii) above
iv).
se of the cost driver for
o (iii), and comment on
ion of the cause of each
(10 marks)
may be encountered in
sed system of product
(5 marks)

(20 marks)
e Advanced Performance
Management

(a)
Calculate the profit per procedure for each of the three procedures, using the current basis for
Requirement:
Explain
what is the
meant
by non-value
adding
activities,
and discuss
charging
costs
of support
activities
to procedures.
the Calculate
usefulness the
of this
formper
of analysis.
(7 marks)
(b)
profit
procedure for each of the
three procedures using activity-based costing
Stagein
4 which
Management
Accounting Control
Systems
(c) Discuss CIMA
the ways
the information
obtained
by the project team may be of benefit to
the management of the company

IM11.4 Intermediate: Calculation of ABC product costs and a

discussion of the usefulness of ABC. Trimake Limited makes three
9) Trimake Limited makes three main products, using broadly the same production methods and
main products, using broadly the same production methods and
equipment
for each. A conventional product costing system is used at present, although an
equipment for each. A conventional product costing system is used
activity-based costing (ABC) system is being considered. Details of the three products for a typical
at present, although an activity-based costing (ABC) system is being
period are:
considered. Details of the three products for a typical period are:
Hours per unit

Product X
Product Y
Product Z

Labour
hours

Machine
unit

Materials
per unit

Volumes
Units

1
1

1
1
3

20
12
25

750
1250
7000

Direct labour costs 14 per hour and production overheads are

absorbed
on a machine
hourper
basis.
Theand
rateproduction
for the periodoverheads
is 28 per are absorbed on a machine hour basis.
Direct
labour
costs 14
hour
machine
The
ratehour.
for the period is 28 per machine hour.
ASSESSMENT MATERIAL
(a) You are required to calculate the cost per unit for each

ASSESSMENT MATERIAL
a) You
are required
to calculate
the cost per unit (4
formarks)
each product using conventional methods.
product
using conventional
methods.
Further analysis shows that the total of production overheads can be
Cost driver analysis
Further
analysis
shows
the total
of production
overheads
bedriver
divided
as follows:
Further
analysis
shows
thatthat
the total
of production
overheads
can be can
Cost
analysis
divided as
follows:
Annual cost driver Volume per com
divided as follows:
Annual
driver
(%)
Cost driver
Part
1 cost
Part
2 Volume
Part per
3 com
(%)

Cost driver

Part 1

Part 2

Part 3

Costs relating to set-ups

35
Costs relating to set-ups
35
Costs relating
to machinery
20
Costs relating to machinery
20
Costs relating to materials handling
15
Costs relating to materials handling
15
Costs relating
to
inspection
30
Costs relating to inspection
30
Total production
overheadoverhead
100% 100%
Total production

Material movements
180
160
1 000
Material movements
180
160
1 000
Number of orders
200
300
2 000
Number of orders
200
300
2 000
Number of set-ups
12
12
300
Number of set-ups
12
12
300
Maintenance
hours
7
000
5
000
10
000
Maintenance hours
7 000
5 000
10 000
Number
of inspections
360
360
22400
Number
of inspections
360
360
400
Direct
labour
hours
150
000
350
000
200
Direct labour hours
150 000 350 000 200000
000 44
The following
are associated
with the
product
line line
The activity
followingvolumes
activity volumes
are associated
with
the product
The following activity volumes are associated with the product
line
forlabour
the
period
as 50
a whole.
Total
Direct
labour
hours
000
100
000
60
000
11
Direct
hours
50
000
100
000
60
000
for the period
as period
a whole.
for the
as a whole.
activities for the period:
Total activities
for the period:
Total activities
for the period:
You required
are required
to compute
unit
costsforforproducts
productsAAaa
You are
to compute
thethe
unit
costs
of
NumberNumber
of
a traditional
volume-based
productcosting
costingsystem
system
usingusing
(i) a (i)
traditional
volume-based
product
movements
ofNumber
Number
of
of of
Number Number movements
(ii)
an
activity-based
costing
system.
materials inspections
inspections (ii) an activity-based costing system.
of set-upsof set-ups materials

IM11.6 Advanced: Profitability analysis using ABC as trad

75
12
150 IM11.6
Advanced: Profitability analysis using ABC as tradi
75
12
150
cost
allocation bases. ABC plc, a group operating retail sto
115
21
180 cost allocation
bases. ABC plc, a group operating retail stor
115
21
180
compiling its budget statements for the next year. In this ex
480
87
670
compiling
its
budget
statements for the next year. In this ex
480
87
670
revenues and costs at each store A, B and C are predicted.
670
120
1000
revenues
and
costs
at
each
store
B and C are
670
120
1000
Additionally, all central
costs
of A,
warehousing
andpredicted.
a head of
are required
Additionally,
central
of warehousing
head
off
b)You
calculate
the cost per unit for each product using ABC principles;
allocatedall
across
thecosts
three stores
in order to and
arrivea at
a total
You are required
(c) to(b)comment
onthe
thecost
reasons
forforany
differences
in ABC
the costs
innet
your
answers
(a)stores
and (b).
allocated
across
the to
three
in order to arrive at a total c
profit
of each
store
operation.
to calculate
per unit
each
product using
eachyears
storethe
operation.
earlier
central costs were allocated in total b
(b) to calculate
the cost per unit for each product using ABC
principles;
(15 marks) net profitInof
total years
sales value
of eachcosts
store.were
But as
a resultinoftotal
dissat
Inthe
earlier
the central
allocated
b
(c) to comment on the reasons for any differences
the costs in
principles;
(15inmarks)
expressed
by some
store store.
managers
ar
youronanswers
to (a) for
andany
(b).differences in the costs
(3inmarks) the total
sales value
of each
Butalternative
as a resultmethods
of dissati
(c) to comment
the reasons
evaluated.
your answers to (a)CIMA
and Stage
(b). 3 Management Accounting
(3 marks)
Techniques expressed by some store managers alternative methods are
The predicted results before any re-allocation of central c
evaluated.
CIMA Stage 3 Management Accounting Techniques
as
follows:
The predicted results before any re-allocation of central c
IM11.5 Advanced: Comparison of traditional product costing with
as follows:
A
B
ABC. Duo plc produces two products, A and B. Each has two
IM11.5 Advanced: Comparison of traditional product costing with
(000)
(000)
components specified as sequentially numbered parts, i.e. product A
A
B
%
6%
ABC.
Duo (parts
plc produces
and 3B.and
Each
1 and 2) two
and products,
product B A
(parts
4). has
Two two
production
(000)
(000)
Sales
5000
4000
components
specified as
sequentially
numbered
parts, i.e.byproduct
A
departments
(machinery
and fitting)
are supported
five service
Costs
of
sales
2800
2300
(parts 1 and
2) and(material
product procurement,
B (parts 3 and
4). Two
production
activities
material
handling,
maintenance, Sales
5000
4000
Gross margin
2200
1700
Product X

Product X
Product Y
Product Y
Product Z
Product Z

Lim,%2014%
10) A company sells and services photocopying machines. Its sales department sells the machines and
consumables, including ink and paper, and its service department provides an after sales service
to its customers. The after sales service includes planned maintenance of the machine and repairs
in the event of a machine breakdown. Service department customers are charged an amount per
copy that differs depending on the size of the machine.

The companys existing costing system uses a single overhead rate, based on total sales revenue
from copy charges, to charge the cost of the Service Departments support activities to each size of
machine. The Service Manager has suggested that the copy charge should more accurately
reflect MATERIAL
ASSESSMENT
MATERIAL 27
ASSESSMENT
the costs involved. The companys accountant has decided to implement an activity-based costing
system
andhas
has
obtained
the following
information
about the support
activities
of the service
Each
customer
has
a service
contract
machines
ave
systemand
andhas
obtainedthe
thefollowing
followinginformation
informationabout
aboutthe
thesupport
support
Each
customer
has
a service
contract
for for
twotwo
machines
on on
averag
system
obtained
department:
activities of the service department:
activities of the service department:

Overheads
Overheads
perannum
annum
per
$000
$000

Activity
Activity

Costdriver
driver
Cost

Customer account
account
Customer
handling
handling
Planned maintenance
maintenance
Planned
scheduling
scheduling
Unplannedmaintenance
maintenance
Unplanned
scheduling
scheduling
Spare part
partprocurement
procurement
Spare

Numberofofcustomers
customers
Number

Other
Other overheads
overheads
Total
Total overheads
overheads

126
126

Numberofofplanned
planned
Number
maintenancevisits
visits
maintenance
Numberofofunplanned
unplanned
Number
maintenancevisits
visits
maintenance
Numberofofpurchase
purchase
Number
orders
orders
Number
Numberofofmachines
machines

480
480

Required:
Required:
Calculate
annual
profit
machine
each
of the
(a)(a)
Calculate
thethe
annual
profit
perper
machine
for for
each
of the
thre
sizes
of
machine,
using
the
current
basis
for
charging
sizes of machine, using the current basis for charging thet
costs
support
activities
machines.
(4 m
costs
of of
support
activities
to to
machines.
(4 mark
Calculate
annual
profit
machine
each
of the
(b)(b)
Calculate
thethe
annual
profit
perper
machine
for for
each
of the
thre
sizes
machine
using
activity-based
costing. (14(14
m
sizes
of of
machine
using
activity-based
costing.
mark
Explain
potential
benefits
to the
company
of using
(c)(c)
Explain
thethe
potential
benefits
to the
company
of using
an
activity-based
costing
system.
(7 m
activity-based
costing
system.
(7 mark

147
147
243
243
600
600
1596
1596

The
following
data
have
also
been
collected
for
eachsize:
machine
size:
The
data
have
also
for
machine
The following
following
data
have
alsobeen
beencollected
collected
foreach
each
machine
size:
Small
Medium
Large
Small
Medium
Large
photocopiers
photocopiers photocopiers
photocopiers photocopiers
photocopiers
Charge
Charge per
percopy
copy
Average
Average number
numberofof
copies
copies per
peryear
year
per
per machine
machine
Number
Number of
ofmachines
machines
Planned
maintenance
Planned maintenance
visits
visits per
permachine
machine
per
per year
year
Unplanned
Unplannedmaintenance
maintenance
visits per machine
visits per machine
per year
per year
Total number of
Total number of
purchase orders
purchase orders
per year
per year
Cost of parts per
Cost of parts per
maintenance visit
maintenance visit
Labour cost per
Labour cost per
maintenance visit
maintenance visit

$0.03
$0.03

$0.04
$0.04

$0.05
$0.05

60
60000
000
300
300

120
120000
000
800
800

180
000
180
000
500
500

44

66

1212

1
1

500
500

1200
1200

1000
1000

$100
$100

$300
$300

$400
$400

$60
$60

$80
$80

$100
$100

Each customer has a service contract for two machines on average:

A) Calculate the annual profit per machine for each of the three sizes of machine, using the
current basis for charging the costs of support activities to machines.
B) Calculate the annual profit per machine for each of the three sizes of machine using activitybased costing.

7%

Lim,%2014%
Answer Key:
1)

The main difference between a traditional based costing and an ABC system is that an ABC tends
to have more detailed cost drivers, and allocates costs based on specific activities as opposed to
just a singular overhead rate.

2) Traditional costing is likely to report distorted costs when there is a significant amount of
different products and overhead comprises a large amount of costs. It is especially distorted when
direct labor or direct machine hours are used but some products are more complicated than the
other products.
3) Some costs are incurred on a batch level as opposed to a unit level basis, and high volume
products tend to have a larger batch size. For example, a high volume product would have a batch
size of 100 and a low volume product would have a batch size of 10. If you allocate them on a unit
basis instead of a batch basis, you will overcost the high volume for things such as machine
setups, orders, or inspections.
4) a) Step 1: Obtain total overhead costs:
Total overhead costs = 10,430 + 5,250 +3,600 +2,100 + 4,620 = 26,000
Step 2: Total Machine Hours
120 x 4 + 100 x 3 + 80 x 2 + 120 x 3
= 480 + 300 + 160 + 360
= 1,300
Step 3: Get overhead rate
= 26,000 / 1,300
= $20 / hour
Step 4 : Allocate!

Traditional*Costing*
!!
Volume!
!!
Cost*Per*UNIT*
Direct!Materials!
Direct!Labor!!
Direct*Cost*Per*Unit*
Machine!Hour!Per!Unit!
Total!Machine!Hours!
Used!
!!
Indirect!Costs!
Direct!Costs!
Total!Cost!
Total*Cost*Per*Unit*

!!
A!

!!
B!
120!

!!
!!

!!

!!
C!
100!

!!
!!

!!
D!
80!

!!
!!

120!
!!
!!

40!
28!
68*
4!

50!
21!
71*
3!

30!
14!
44*
2!

60!
21!
81*
3!

480!

300!

160!

360!

!!

!9,600.00!! !6,000.00!!
!8,160.00!! !7,100.00!!
!17,760.00!! !13,100.00!!
*148.00**
*131.00**

!!

!!
!3,200.00!! !7,200.00!!
!3,520.00!! !9,720.00!!
!6,720.00!! !16,920.00!!
*84.00**
*141.00**

8%

Lim,%2014%
b) Step 1: Obtain overhead cost per activity center and list activity drivers
Step 2: calculate for total activity
Step 3: Solve for rate per activity driver
Step 4: Allocate

Activity*Based*
!!
Volume!
!!
Cost*Per*UNIT*
Direct!Materials!
Direct!Labor!!
Direct*Cost*Per*Unit*
Machine!Hour!Per!Unit!
Machine!Hours!Used!
Number!of!Production!
Runs!
Requisitions!Raised!
Orders!
!!
Direct*Costs*
Machine!Department!
SetPUp!
Stores!Receiving!
Inspection!
Materials!Handling!
Total*Indirect*Cost*
Total!Cost!
Cost*Per*Unit*

!!
!!

!!
!!

!!
!!

120!
!!
!!

!!
!!

100!
!!
!!

80!
!!
!!

120!
!!
!!

40!
28!
68*
4!
480!

50!
21!
71*
3!
300!

30!
14!
44*
2!
160!

60!
21!
81*
3!
360!

6!
20!
12!

5!
20!
10!

4!
20!
8!

6!
20!
12!

!!

!!
*8,160.00**
!3,851.08!!
!1,500.00!!
!900.00!!
!600.00!!
!1,320.00!!
!8,171.08!!
!16,331.08!!
*136.09**

!!
*7,100.00**
!2,406.92!!
!1,250.00!!
!900.00!!
!500.00!!
!1,100.00!!
!6,156.92!!
!13,256.92!!
*132.57**

!!
*3,520.00** *9,720.00**
!1,283.69!! !2,888.31!!
!1,000.00!! !1,500.00!!
!900.00!!
!900.00!!
!400.00!!
!600.00!!
!880.00!! !1,320.00!!
!4,463.69!! !7,208.31!!
!7,983.69!! !16,928.31!!
*99.80**
*141.07**

c) The costing for product C is significant different. Why? The number of requisitions raised is
the same regardless of volume. Because C is a low volume product, this cost is allocated to less
units.
5) Every problem beyond this point is a bit repetitive, but practice makes perfect. !
I actually recommend converting everything to a per product basis (total indirect cost per product)
instead of on a per batch / per unit basis. As I discussed, this can hlep serve as your double-checking
mechanism for errors. Remember to convert everything and be aware if it is stated in per units or per
batch. So get the number of batches first.

Volume!
Batch!size!
Number!of!Batches!

!1,500!!
50!
!30!!

!2,500!!
100!
!25!!

!4,000!!
500!
!8!!

9%

Lim,%2014%

Activity*
Maintenance!
Setup!
Purchase!
Handling!
Others!

Driver*
Machine!Hours!
Machine!Setups!
Purchase!Orders!
Material!
Movements!
Labor!Hours!

X*

Activity*
Total*Cost*
Maintenance!
100,000!
Setup!
70,000!
Purchase!
90,000!
Handling!
60,000!
Others!
80,000!

Y*

Z*

!4,500!!
!60!!
!120!!

!5,000!!
!75!!
!100!!

!300!!
!3,000!!

!125!!
!10,000!!

Total*
Activity*
!12,000!!
!21,500!!
!8!!
!143!!
!48!!
!268!!
!32!!
!12,000!!

!457!!
!25,000!!

Total*
Activity*
Rate*
!21,500!!
!4.65!!
!143!!
!489.51!!
!268!!
!335.82!!
!457!!
!131.29!!
!25,000!!
!3.20!!

Post-allocation, the sum of the allocated costs should still be 400,000. This is how you know you are right,
and why doing in on a per product basis is useful. We can divide it accordingly if we want to get costs on a
per batch or per unit basis.

Activity*
Maintenance!
Setup!
Purchase!
Handling!
Others!
!!
!!
!!

Driver*
Machine!Hours!
Machine!Setups!
Purchase!Orders!
Material!
Movements!
Labor!Hours!
Total*Indirect*Cost*
Total!Units!
Indirect*Cost*/*Unit*

X*

Y*

Z*

!20,930!!
!29,371!!
!40,299!!

!23,256!!
!36,713!!
!33,582!!

Total*
!55,814!!
!100,000!!
!3,916!!
!70,000!!
!16,119!!
!90,000!!

!39,387!!
!9,600!!
*139,587**
!1,500!!
*93.06**

!16,411!!
!32,000!!
*141,963**
!2,500!!
*56.79**

!4,201!!
!60,000!!
!38,400!!
!80,000!!
*118,451**
*400,000**
!4,000!! !!
*29.61** !!

Main difference between this and traditional costing is product X and Z. Because Product Zs batch size is
so much bigger, it has a tendency to incur less costs since it uses less batches (8) as opposed to X (30).
Pareto will be explained in POM105.
6) Similar ABC problem but applied to a service company, which is kinda cool. In order to show the
effect of a change in system (20% of total costs), we need to compute both traditional and ABC.
Certainly, the total cost will change based on the system, and so will the selling price.
First, compute traditional-based costing. If we need to use only one cost driver (hours preparing
account services), then we need to allocate the TOTAL costs to this single driver.

Accounts!Prep.!
Requesting!Mission!
Issuing!Fees!Payment!
%

580,000!
30,000!
15,000!
10%

Lim,%2014%
Reminders!
Holding!Client!Meetings!
Travelling!to!Clients!
Total*

60,000!
40,000!
725,000*

We allocate the 725,000 to the three clients using only one cost driver. The TOTAL hours spent is
18,000 (better read closely, the problem gives you the hours used by three clients and the TOTAL firm
as a whole, which includes the three clients. Do not double count!).
725,000 / 18,000 = $40.28 per hour spent on preparing account services

!!
Accounts!Prep.!
Allocated!Cost!
Selling!Price!(20%)!

A!

B!
!1,000!!
!40,278!!
!48,333!!

C!
!250!!
!10,069!!
!12,083!!

!340!!
!13,694!!
!16,433!!

Activity-Based Costing: Same process, just a little longer. Remember that the TOTAL IS ALREADY
GIVEN.

!!

Activity!

Accounts!Prep.!
Requesting!Mission!
Issuing!Fees!Payment!
Reminders!
Holding!Client!Meetings!
Travelling!to!Clients!
Total*

580,000!
30,000!
15,000!
60,000!
40,000!
725,000*

Driver!
Hours!Spent!on!
Prep!
Requests!for!
Missing!Info!
Payment!
Reminders!Sent!
Client!Meetings!
Held!
Miles!Traveled!
!!

Total!
Activity!

Rate!per!
Activity!

18,000!

!32.22!!

250!

!120.00!!

400!

!37.50!!

250!
10,000!

!240.00!!
!4.00!!

!!

!!

Allocate the rates to the clients!

!!
A!
Accounts!Prep.!
Requesting!Mission!
Issuing!Fees!Payment!
Reminders!
Holding!Client!Meetings!
Travelling!to!Clients!
Total*
*Selling*Price**

B!

C!

!32,222!!
!480!!

!8,056!!
!1,200!!

!10,956!!
!720!!

!75!!
!960!!
!600!!
*34,337**
*41,205**

!300!!
!240!!
!2,400!!
*12,196**
*14,635**

!375!!
!480!!
!P!!!!
*12,531**
*15,037**

11%

Lim,%2014%
7) Key thing: Dont forget the DLH Cost. Its hidden within the paragraphs at $5 per hour, and the
table is stated in TOTAL DLH annually for all units produced, while selling price and raw
materials is per unit. It is asking for total profit so you need to solve for total costs.
Starting with the traditional costing:

!!
Deliveries!to!
retailers!
SetPup!cost!
Purchase!orders!
!!

Costs*
2,400,000!
6,000,000!
3,600,000!
12,000,000*

Rate: 12,000,000 / 500,000 = $24 / hour

!!

Units* Annual*DLH* Allocated*OH*

Sunshine! 2,000!

200,000!

Roadster! 1,600!

220,000!

Fireball!

400!

Raw*
Mat*
Costs**

DLH*(total**
hours*x*5)* Total*Cost*

Total*
Revenue*

Profit*
!
!4,800,000!! 800,000!! !1,000,000!! !6,600,000!! !8,000,000!! !1,400,000!!
!
!5,280,000!! 960,000!! !1,100,000!! !7,340,000!! !9,600,000!! !2,260,000!!
!
!1,920,000!! 360,000!!
!400,000!! !2,680,000!! !3,200,000!! !520,000!!

80,000!

Profit*
Per*
Unit*
*700**
*1,413**
*1,300**

Let us do Activity Based Costing next. I want you to be conscious about the axis. Sometimes the rows are the activities
and sometimes they are the columns.

!!
Deliveries!to!
retailers!
SetPup!cost!
Purchase!orders!

!!
Sunsh
ine!
Roads
ter!
Fireb
all!

Deliveries*

Costs*
2,400,000!
6,000,000!
3,600,000!

SetWUps*

!960,000!! !2,100,000!!
!768,000!! !2,400,000!!
!672,000!! !1,500,000!!

Purchase*
Orders*

Total*
Activity*

Rate*per*
Activity*

250!
100!
800!

Total*OH*

!9,600!!
!60,000!!
!4,500!!
Raw*
Mat*
Costs**

!
!1,800,000!! !4,860,000!! 800,000!!
!
!1,350,000!! !4,518,000!! 960,000!!
!
!450,000!! !2,622,000!! 360,000!!

DLH*(total*
hours*x*5)*
!1,000,000!!
!1,100,000!!
!400,000!!

Total*Cost*

Total*
Revenue*

!
!6,660,000!! 8,000,000!!
!
!6,578,000!! 9,600,000!!
!
!3,382,000!! 3,200,000!!

Profit*
!1,340,000!!

!670!!

!3,022,000!!

!1,889!!

P182,000!!

P455!!

b) The finance director is right that the more complicated fireball is selling at a loss, and ABC does show it
to him (contrary to his hesitation regarding ABC). This shows the flexibility of ABC system for complex
products. It does not average the costs of the entire production, contrary to the marketing directors
stance. Some OH can still be variable and this is where ABC becomes important.

Profit*
Per*
Unit*

12%

Lim,%2014%
8) This is ABC applied to a healthcare system. We are running out of examples to use at this point haha!
What is unusual about this problem is that REVENUE is the cost driver ($ sales).

!!
Theatre!Prep.!
Operating!
Theatre!
Nursing!
Administration!
Overhead!
Total*OH*
!!
Fee!
Volume!
Revenue!

Total!OH!
864,000!
1,449,000!
5,428,000!
1,216,000!
923,000!
9,880,000*
Hip!

Knee!
8,000!
600!
!4,800,000!!

Shoulder!

TOTAL*
6,000! !!
400! !!
!2,400,000!!
15,200,000*

10,000!
800!
!8,000,000!!

Effectively you divide total OH by total revenue. 9,880,000 / 15,200,000 = 0.65 or 65% of a dollar is OH

!!
Fee!Charged!
Surgeon!Fee!
Follow!Up!Fee!
Supply!Fee!
OH!Fee!
Profit!

Hip!

!!
Number*of*Procedures*
Average!Time!per!Procedure!
Procedures!Per!Theatere!
Sessions!
InPpatient!days!per!procedure!
Solve!for!the!following:!
Number*of*Theatere*
Preparations*
Total*Procedure*Time*
InWPatient*Days*
Sales*Revenue*

Knee!

Shoulder!

8,000!
(1,200)!
(300)!
(400)!
(5,200)!
900!

10,000!
(1,800)!
(300)!
(200)!
(6,500)!
1,200!

6,000!
(1,500)!
(300)!
(300)!
(3,900)!
0!

!Hip!!
!600!!
!2.00!!

!Knee!!
!800!!
!1.20!!

!Shoulder!!
!400!!
!1.50!! !!

!2!!
!3!!

!1!!
!2!!

!4!! !!
!1!! !!
!!

!!

!!
!300!!
!1,200!!
!1,800!!
!4,800,000!!

!!

*Total**
!1,800!!

!800!!
!100!!
!1,200!!
!960!!
!600!!
!2,760!!
!1,600!!
!400!!
!3,800!!
!8,000,000!! !2,400,000!! !15,200,000!!

13%

Lim,%2014%
!!
Theatre!Prep.!
Operating!Theatre!
Nursing!
Administration!
Overhead!

Total!OH!
864,000!
1,449,000!
5,428,000!
1,216,000!
923,000!

!!
Theatre!Prep.!
Operating!Theatre!
Nursing!
Administration!
Overhead!
Total*OH*
OH*per*Procedure*

Total!OH!
!Hip!!
!Knee!! !Shoulder!!
864,000! !216,000!! !576,000!!
!72,000!!
1,449,000! !630,000!! !504,000!! !315,000!!
5,428,000! !2,571,158!! !2,285,474!! !571,368!!
1,216,000! !384,000!! !640,000!! !192,000!!
923,000! !307,667!! !410,222!! !205,111!!
9,880,000* *4,108,825** *4,415,696** *1,355,480**
**
*6,848**
*5,520**
*3,389**

!!
Fee!Charged!
Surgeon!Fee!
Follow!Up!Fee!
Supply!Fee!
OH!Fee!
Profit!

Activity!Driver!
Volume!
Activity!Rate!
Num!of!Preps.!
!1,200!!
!720.00!!
Procedure!Time!
!2,760!!
!525.00!!
InPPatient!days!
!3,800!!
!1,428.42!!
Revenue!
!15,200,000!!
!0.08!!
Num!of!Procedures!
!1,800!!
!512.78!!

Hip!

Knee!
8,000!
(1,200)!
(300)!
(400)!
(6,848)!
(748)!

Shoulder!
10,000!
(1,800)!
(300)!
(200)!
(5,520)!
2,180!

6,000!
(1,500)!
(300)!
(300)!
(3,389)!
511!

ABC is useful for finding out which part of the procedure is inefficient (costs too much), after which
operations can be revamped. For a hospital, its not feasible to simply drop a procedure offering because it
does not make any money.
9) a)

!!
Product!X!
Product!Y!
Product!Z!

Labor*
Hour*

Machine*
Direct*
Cost*Per*
Hour*
Labor*Cost* Overhead* Materials* Unit*
0.5!
1.5!
!7!!
42!
20!
!69!!
1.5!
1!
!21!!
28!
12!
!61!!
1!
3!
!14!!
84!
25!
!123!!

b) The first step is to get the total overhead cost, which is not directly given to you. However, it
told you that the rate per hour is $28 / hour and you can solve for the total machine hours.

!!
Product!X!
Product!Y!
Product!Z!
!!

Machine*Hours*
Volume*
Total*Machine*Hours*
1.5!
750!
!1,125!!
1!
1,250!
!1,250!!
3!
7,000!
!21,000!!
!!
!!
*23,375**

3,375 x 28 = $654,500 Overhead

14%

Lim,%2014%
Distribute the overhead:

!!
Setups!
Machinery!
Materials!
Handling!
Inspection!
!!
!!
Setups!
Machinery!
Materials!
Handling!
Inspection!
!!

%!

Cost!
35%!
!229,075!!
20%!
!130,900!!
15%!
30%!

!!
%!

!!

!98,175!!
!196,350!!
*654,500**

Cost!
Driver!
35%! !229,075!! Number!of!Setups!
20%! !130,900!! Machine!Hours!
Material!
15%!
!98,175!! Movements!
Number!of!
30%! !196,350!! Inspectiosn!
*654,500** !!

Total!
Rate!Per!
Activity!
Activity!
670!
!341.90!!
!23,375!!
!5.60!!

!!

120!

!818.13!!

1,000!

!196.35!!
!!

On a total basis:

!!
Setups!
Machine!Hours!
Materials!Handling!
Inspection!
!!
Setup!Cost!
Macinery!Cost!
Materials!Cost!
Inspection!Cost!
Total!Overhead!Cost!
Number!of!Units!
OH!per!Unit!
Direct!Labor!
Direct!Materials!
Total*Cost*Per*Unit*

Product*X*
!75!!
!1,125!!
!12!!
!150!!
!!
!25,642.72!!
!6,300.00!!
!9,817.50!!
!29,452.50!!
!71,212.72!!
750!
!94.95!!
7!
20!
*121.95**

Product*Y*
!115!!
!1,250!!
!21!!
!180!!
!!
!39,318.84!!
!7,000.00!!
!17,180.63!!
!35,343.00!!
!98,842.47!!
1,250!
!79.07!!
21!
12!
*112.07**

Product*Z*
!480!!
!21,000!!
!87!!
!670!!
!!
!164,113.43!!
!117,600.00!!
!71,176.88!!
!131,554.50!!
!484,444.81!!
7,000!
!69.21!!
14!
25!
*108.21**

The key difference is because product Z was slightly overcharged. Multiplied by the large amount of units,
the difference is enhanced. The overcharging was because product Z uses a disproportionate amount of
machine hours, even though some costs are not machine driven.

15%

Lim,%2014%
10) You have to multiply the charge by the average number of copies per machine and multiply it by
the number of machines (multiply it twice!). Remember to understand the problem.
One more important thing: When it is asking you for the total profit, it is one thing to compute for
the indirect cost allocation, but another to find the other direct costs. Remember to compute for
the labor and part costs (direct labor and direct material also!)
Direct Cost Computation:
!!

Small*

Medium**

Large*

Planned!Maintenance!per!Machine!

!4!!

!6!!

!12!!

Unplanned!Maintenance!per!Machine!

!1!!

!1!!

!2!!

Total!Visits!

!5!!

!7!!

!14!!

!100!!

!300!!

!400!!

!60!!

!80!!

!100!!

Part!Cost!per!Visit!
Labor!Cost!per!Visit!
!!

!!

!!

!!

Total*Part*Cost*Per*Machine*

*500**

*2,100**

*5,600**

Total*Labor*Cost*Per*Machine*

*300**

*560**

*1,400**

!!

Small*

Charge!Per!Copy!
Ave.!Number!of!Copies!per!Machine!

Large*

!!

0.03!

0.04!

0.05!

!!

60,000!

120,000!

180,000!

!!

300!

800!

500!

!!

Number!of!Machines!
Total*Revenue*

Medium**

*540,000** *3,840,000** *4,500,000** *8,880,000**

Overhead cost / revenue = 1,596,000 / 8,880,000 = 0.18

!
Total!Revenue!per!Machine!

Small!

Medium!

Large!

!1,800!!

!4,800!! !9,000!!

Part!Cost!per!Machine!

!500!!

!2,100!! !5,600!!

Labor!Cost!per!Machine!

!300!!

!560!! !1,400!!

OH!Cost!per!Machine!

!324!!

!864!! !1,620!!

Total*Profit*per*Machine*

*676**

*1,276**

*380**

Some of the given in the problem are already in total (like purchase orders) some are on a per machine
basis.
!!
Charge!Per!Copy!
Ave.!Num!of!Copies!per!Machine!
Number!of!Machines!

0.03!
60,000!
300!

Medium** Large*
0.04!

TOTAL*

0.05! **

120,000! 180,000! !!
800!

500! !!

Planned!Maintenance!per!Machine!

4!

6!

12! !!

Unplanned!Maintenance!per!Machine!

!1!!

!1!!

!2!! !!

Total!Purchase!Orders!Per!Year!

!500!!

!1,200!!

!1,000!! !!

Cost!of!Parts!per!Maintenance!Visit!

!100!!

!300!!

!400!! !!

!60!!

!80!!

!100!! !!

Labor!Cost!Per!Maintenance!

Small*

16%

Lim,%2014%
!!

!!

!!

!!

!!

Solve:!

!!

!!

!!

!!

Total!Customers!

!150!!

!400!!

!1,200!!

!4,800!!

Total!Unplanned!Maintenance!

!300!!

!800!!

!1,000!!

*2,100**

Total!Purchase!Orders!

!500!!

!1,200!!

!1,000!!

*2,700**

Total!Machines!

!300!!

!800!!

!500!!

*1,600**

Total!Planned!Maintenance!

!!

*800**

!6,000!! *12,000**

Driver*

Customer!Account!Handling!

126,000! Number!of!Customers!

Planned!Maintenance!Scheduling!
Unplanned!Maintenance!
Scheduling!

480,000! Number!of!Planned!Maintenance!Visits!
Number!of!Unplanned!Maintenance!
147,000! viists!

Spare!Part!Procurement!

243,000! Number!of!Purchase!Orders!

Other!Overheads!

600,000! Number!of!Machines!

!!

Small*

Total*
Activity*

Rate*
!
!800!! 157.50!!

!12,000!!

!40.00!!

!2,100!!

!70.00!!

!2,700!!

!90.00!!
!
!1,600!! 375.00!!

Medium** Large*

Customer!Account!Handling!

!23,625!!

Planned!Maintenance!Scheduling!

!48,000!! !192,000!! !240,000!!

Unplanned!Maintenance!Scheduling!

!21,000!!

!56,000!!

!70,000!!

Spare!Part!Procurement!

!45,000!! !108,000!!

!90,000!!

!63,000!!

!39,375!!

Other!Overheads!

!112,500!! !300,000!! !187,500!!

Total*Overhead*

*250,125** *719,000** *626,875**

Number!of!Machines!

!300!!

!800!!

!500!!

Overhead!/!Machine!

833.75!

898.75!

1253.75!

Part!Cost!per!Machine!

!500!!

!2,100!!

!5,600!!

Labor!Cost!per!Machine!

!300!!

!560!!

!1,400!!

Total*Cost*

!1,634!!

!3,559!!

!8,254!!

Total!Revenue!per!Machine!

!1,800!!

!4,800!!

!9,000!!

*166**

*1,241**

*746**

Total*Profit*per*Machine*

Overhead*Per*
Annum*

!250!!

17%