Scribd
Upload
377 views15 pages

ABC Costing

The document provides information about a company that produces computer parts and cellphones. It currently uses a plant-wide overhead rate based on direct labor hours to allocate overhead costs, but consultants recommend using activity-based costing instead. The summary calculates costs for each product using both the current method and ABC. Under the current method, the computer part costs $106 to produce and the cellphone costs $36. Using ABC, overhead is allocated to each product based on its usage of three activities: setups, materials handling, and packaging/shipping. This results in more accurate product costs than the plant-wide rate method.

Uploaded by

jpg17
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
377 views15 pages

ABC Costing

The document provides information about a company that produces computer parts and cellphones. It currently uses a plant-wide overhead rate based on direct labor hours to allocate overhead costs, but consultants recommend using activity-based costing instead. The summary calculates costs for each product using both the current method and ABC. Under the current method, the computer part costs $106 to produce and the cellphone costs $36. Using ABC, overhead is allocated to each product based on its usage of three activities: setups, materials handling, and packaging/shipping. This results in more accurate product costs than the plant-wide rate method.

Uploaded by

jpg17
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 15

Activity Based Costing

Asian Institute of Management


MBA 2018
Sample Problem
The Columbus Company produces only two types of product: a major computer
parts and cell phones. The Company uses a normal cost system and overhead costs
are currently allocated using a plant-wide overhead rate based on direct labor
hours. Outside cost consultants have recommended, however, that the Company
should use activity-based costing to charge overhead to products.

The Company expects to produce 4,000 computer parts and 2,000 cellphones
during the year. Each computer part requires two direct labor hours to produce and
each cellphone requires one-half hour to produce.
Sample Problem (cont.)
The direct materials and direct labor The budgeted (estimated) total factory
costs included in the two products are
as follows:
Sample Problems (cont.)
Based on the analysis of the three overhead activities, it was estimated that the
two products would require these activities as follows during the year:
Required:
1. Calculate the cost of each
product using a plant-wide rate
based on direct labor hours
2. Calculate the activity cost rates
for (a) setups (b) material
handling (c) packaging and
shipping.
3. Cost of two products using ABC
costing system.
Solution ☺
Question No. 1 - Calculate the cost of each product using a plant-wide rate based on direct
labor hours
Step 1 – Set up DM, DL and OH (Input the DM and DL given)
Step 2 – Calculation of the plant-wide overhead rate (Budgeted OH/Budgeted Hrs)
• REMINDER: You have to establish a ‘budgeted manufacturing overhead’ and ‘budgeted
hours’
• Most of the time, it is already given. Look for ‘budgeted/estimated total overhead for the
year’
Formula
Budgeted/Desired Number of Units to be Produced x Budgeted Hours
Required Per Unit
***Budgeted and Estimated will be used interchangeably
Given
Budgeted No. of Units Budgeted Hours (amount of time
required to produce 1 unit)
For Computer – 4000 For Computer – 2 hours per unit
For Cellphone – 2000 For Cellphone – 0.5 hour per unit

By applying the formula in the previous slide:


For Computer - 4000 units x 2 hours = 8000 labor hours
For Cellphone – 2000 units x 0.5 hour = 1000 labor hours

TOTAL LABOR HOURS REQUIRED = 9000 (8000 + 1000)


Computation of Pre-determined OH Rate
Total Budgeted Factory Overhead (given) 270000
Divide: Total Labor Hours Required
(Computed in previous slide) 9000
Pre-determined Overhead Rate – Plant wide 30

For Computer:
DM = 30 (given)
DL = 16 (given)
OH = 60 (Predetermined OH Rate of 30 x 2 labor hours per computer)
TOTAL MANUFACTURING COST = 106 (30+16+60)
Computation of Pre-determined OH Rate
For Cellphones
DM = 17
DL = 4
OH = 15 (30 Predetermined OH Rate x 0.5 labor hour per unit)
Total Manufacturing Cost = 36 (sum of 17, 4 and 15)
Activity Cost Rates
Formula: *(Each activity are independent of one another)
ACR Activity 1 = (Budgeted OH Rate/Budgeted Level of Activity)
ACR Activity 2 = (Budgeted OH Rate/Budgeted Level of Activity)
ACR Activity n = (Budgeted OH Rate/Budgeted Level of Activity)

Budgeted Level of ABC Cost


Budgeted OH Rate Units
Activity Rate

Production Setups 80000 20 Setups 4000 per setup

Materials Handling 70000 5000 lbs. 14 per lbs.

Packaging and Shipping 120000 6000 Boxes 20 per box


Computation of Total Cost and Cost per Unit
(Direct Material Cost per Unit x Budgeted Units)
For Computer
Direct Materials = 30 USD per unit x 4,000 units = 120,000

For Cellphone
Direct Materials = 17 USD per unit x 2,000 units = 34,000

**We will use these amounts later


Computation of Total Cost and Cost per Unit
(Direct Labor Cost per Unit x Budgeted Units)
For Computer
Direct Labor = 16 USD per unit x 4,000 units = 64,000 USD

For Cellphones
Direct Labor = 4 USD per unit x 2,000 units = 8,000 USD

**We will use these amounts later


Computation of Manufacturing Overhead
Formula:
PRODUCTION SETUPS
Allocated OH per Activity 1 = Amount of Activity required in Activity 1 x
ABC Cost Rates (computed in Slide 9)
For Computer (5 setups required)
5 setup x 4000 (cost rate) = 20,000
For Cellphone (15 setups required)
15 setup x 2000 (cost rate) = 30,000
Computation of Manufacturing Overhead
Formula:
MATERIALS HANDLING
Allocated OH per Activity 2 = Amount of Activity required in Activity 2 x
ABC Cost Rates (computed in Slide 9)
For Computer (1000 lbs. to produce 4000 units)
1000 lbs. x 14 (cost rate) = 14,000
For Cellphone (4000 lbs. to produce 2000 units)
4000 lbs. x 14 (cost rate) = 56,000
Computation of Manufacturing Overhead
Formula:
PACKAGING AND SHIPPING
Allocated OH per Activity 3 = Amount of Activity required in Activity 3 x
ABC Cost Rates (computed in Slide 9)
For Computer (4000 boxes to produce 4000 units)
4000 boxes x 20 (cost rate) = 80,000
For Cellphone (2000 boxes to produce 2000 units)
2000 boxes x 20 (cost rate) = 40,000
PUTTING IT ALL TOGETHER

You might also like