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Traditional Costing and ABC

This document compares traditional costing and activity-based costing (ABC) methods. Under traditional costing, full cost per unit is calculated using direct materials, direct labor, prime cost, and overheads based on overhead absorption rates. ABC assigns overhead costs to products based on cost pools and cost drivers. It calculates full cost per unit in multiple steps: 1) identifying cost pools, 2) determining cost drivers, 3) calculating cost per driver, 4) allocating overhead to products, and 5) calculating full cost per unit. Shortcuts for both traditional costing and ABC methods are also presented.

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Raihan Sir
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259 views3 pages

Traditional Costing and ABC

This document compares traditional costing and activity-based costing (ABC) methods. Under traditional costing, full cost per unit is calculated using direct materials, direct labor, prime cost, and overheads based on overhead absorption rates. ABC assigns overhead costs to products based on cost pools and cost drivers. It calculates full cost per unit in multiple steps: 1) identifying cost pools, 2) determining cost drivers, 3) calculating cost per driver, 4) allocating overhead to products, and 5) calculating full cost per unit. Shortcuts for both traditional costing and ABC methods are also presented.

Uploaded by

Raihan Sir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Traditional Costing and ABC: Pro-forma

 
Pro-forma: Traditional Absorption Costing

Full cost per unit under traditional absorption costing

Product A B C
$ $ $

Direct materials

Direct labour

Prime cost / Direct costs

Overheads (W)
(OAR x actual level of activity)

Full cost per unit / Absorption


cost per unit

Working
Overhead absorption rate (OAR)
= (budgeted overheads / Budgeted machine hours or labour hours or units)
= $X per labour hour or machine hour or unit

Short cut: Traditional Costing


Total Overhead for product A
= OAR x Product A’s machine hours or labour hours

= (budgeted overheads / Budgeted machine hours or labour hours)


x Product A’s machine hour or Labour hour

Overhead per unit for product A


= Total Overhead for product A / Product A’s production units 

Raihan Sir, Tutor    Contact no: +8801766576106    WhatsApp: +8801766576106 
 
Pro‐forma: ABC 
Full cost per unit under ABC (Step 5)

Product A B C
$ $ $

Direct materials

Direct labour

Prime cost

Overheads (W)

Full cost per unit

     
Working

Cost Pool (Step 1) $ Cost driver (Step 2) Cost per driver (Step 3)

Machine set up cost


Machine running cost

Procurement cost

Delivery cost

(Step 4) Allocation of overhead to product


Product A B C
$ $ $
Machine set up cost

Machine running cost

Procurement cost

Delivery cost

Total overheads

Units produced

Overhead cost per


unit (W)

Raihan Sir, Tutor    Contact no: +8801766576106    WhatsApp: +8801766576106 
 
Short cut: ABC

(a) Activity’s Overhead cost


= (Activity’s overhead / Total no. of cost drivers) x Product’s no. of cost driver

Therefore, Activity’s Overhead cost per unit = (a) / product’s units

Example of shortcut: ABC

(a) Set up’s Overhead cost


= (Set up’s overhead / Total no. of set ups) x Product’s no. of set ups

Therefore, Set up’s Overhead cost per unit = (a) / product’s units
 

Raihan Sir, Tutor    Contact no: +8801766576106    WhatsApp: +8801766576106 
 

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