Activity Based Costing (ABC)

Q1. Triple Limited makes three types of gold watch – the Diva (D), the Classic (C) and the Poser (P). A
traditional product costing system is used at present; although an activity based costing (ABC) system is
being considered. Details of the three products for a typical period are:
Hours per unit Material Production
Labour hours Machine hours Cost per unit ($) Units
Product D ½ 1½ 20 1 ,750
Product C 1½ 1 12 1,250
Product P 1 3 25 7,000
Direct labour costs $6 per hour and production overheads are absorbed on a machine hour basis. The
overhead absorption rate for the period is $28 per machine hour.
Required:
(a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the
basis of machine hours. Total production overheads are $654,500 and further analysis shows that the
total production overheads can be divided as follows:
%
Costs relating to set-ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100
The following total activity volumes are associated with each product line for the period as a whole:
Number of Number of movements Number of
Set ups of materials inspections
Product D 175 112 1,150
Product C 115 121 1,180
Product P 480 187 1,670
670 120 1,000
Required:
(a) Calculate activity based recovery rates (4 marks)
(b) Calculate the cost per unit for each product using ABC principles (work to two decimal places).
(c) Discuss why ACTIVITY BASED COSTING gives better result as compared with traditional absorption
costing in today’s manufacturing environment. (4 marks)
(d) What will be impact on pricing and profitability if company switches to ACTIVITY BASED COSTING?

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c) REASONS TO SUPPORT ABC
i. The complexity of manufacturing has increased, with wider product ranges, shorter product life cycles
and more complex production processes. ABC recognises this complexity and distributes overheads by
using multiple cost drivers which is in contrast of traditional absorption costing which uses single cost
driver.
ii. Cost per unit computed under ABC is more accurate compared with traditional absorption costing
which helps management to calculate better selling price.
iii. ABC results in detailed distribution of overheads to the cost of the product and helps management to
identify which cost driver is actually causing the overheads. It is a useful information as in a more
competitive environment, companies must be able to assess product profitability realistically.
iv. It provides data which can be used in cost controlling and in other decision making techniques

d) Pricing and Profitability

Switching to ABC can substaintially change the costs per unit calculations. Consequently if an
organization’s selling prices are determined by a version of cost plus then the selling prices would alter
as well.
In this case the selling price of D and C would rise significantly, and selling price of P would fall. This, at
first glance may be appealing however:
• Will the markets for D and C tolerate a price rise? There could be competition to consider. Will
customers will be willing to pay more for a product simply because Triple Ltd has changed its
cost allocation method
• Product P is high volume product. Reducing its selling price will have a dramatic effect on
revenue and contribution. One would question whether such a reduction would be
compensated for by increase in sales volume.
Alternatively one could take the view that prices are determined by market forces. If Triple ltd switches
to ABC, it is not the price that would change, its actually profit margin that would change.
This can change attitudes within the business. Previously high margin products (under a traditional
overhead absorption system) would be shown as less profitable. Salesmen (possibly profit motivated)
can begin to push sales of different products seeking higher personal reward (assuming commission
based on profit per unit sold)
It MUST always be remembered that if overheads are essentially fixed then they should be ignored in
business decision making. Switching to ABC can change reported profit er unit but its contribution per
unit that is perhaps more important

Q2. Linacre Co operates an activity-based costing system and has forecast the following information for
next year.
Cost Pool Cost Cost Driver No of Drivers
Production set-ups £105,000 Set-ups 300
Product testing £300,000 Tests 1,500
Component supply and storage £25,000 Component orders 500
Customer orders and delivery £112,500 Customer orders 1,000
General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are
expected to be £900,000 and these overheads are absorbed on a direct labour hour basis. Total direct
labour hours for next year are expected to be 300,000 hours.
Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders
of 50 units per order. The company holds no stocks of Product ZT3 and will need to produce the order
requirement in production runs of 900 units. One order for components is placed prior to each production
run. Four tests are made during each production run to ensure that quality standards are maintained.

The following additional cost and profit information relates to product ZT3:
Component cost: £1·00 per unit
Direct labour: 10 minutes per unit at £7·80 per hour
Profit mark up: 40% of total unit cost
Required:
Calculate cost per unit of Product ZT3 by using ABC

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Q3. Jola Publishing Co publishes two forms of book.
The company publishes a children’s book (CB), which is sold in large quantities to government controlled
schools. The book is produced in only four large production runs but goes through frequent government
inspections and quality assurance checks. The paper used is strong, designed to resist the damage that
can be caused by the young children it is produced for.
The book has only a few words and relies on pictures to convey meaning.
The second book is a comprehensive technical journal (TJ). It is produced in monthly production runs, 12
times a year. The paper used is of relatively poor quality and is not subject to any governmental controls
and consequently only a small number of inspections are carried out. The TJ uses far more machine
hours than the CB in its production.
The directors are concerned about the performance of the two books and are wondering what the impact
would be of a switch to an activity based costing (ABC) approach to accounting for overheads. They
currently use absorption costing, based on machine hours for all overhead calculations. They have
accurately produced an analysis for the accounting year just completed as follows:
CB TJ
$per unit $per unit $per unit $per unit
Direct production costs
Paper 0·75 0·08
Printing ink 1·45 4·47
Machine costs 1·15 1·95
3·35 6·50
Overheads 2·30 3·95
Total cost 5·65 10·45
Selling price 9·05 13·85
Margin 3·40 3·40

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The main overheads involved are:
Overhead % of total overhead Activity driver
Property costs 75·0% Machine hours
Quality control 23·0% Number of inspections
Production set up costs 2·0% Number of set ups
If the overheads above were re-allocated under ABC principles then the results would be that the
overhead allocation to CB would be $0·05 higher and the overhead allocated to TJ would be $0·30 lower
than previously.
Required:
(a) Explain why the overhead allocations have changed in the way indicated above.
(b) Briefly explain the implementation problems often experienced when ABC is first introduced.
The directors are keen to introduce ABC for the coming year and have provided the following cost and
selling price data:
1. The paper used costs $2 per kg for a CB but the TJ paper costs only $1 per kg. The CB uses 400g of paper
for each book, four times as much as the TJ uses.
2. Printing ink costs $30 per litre. The CB uses one third of the printing ink of the larger TJ. The TJ uses
150ml of printing ink per book.
3. The CB needs six minutes of machine time to produce each book, whereas the TJ needs 10 minutes per
book. The machines cost $12 per hour to run.
4. The sales prices are to be $9·30 for the CB and $14·00 for the TJ As mentioned above there are three
main overheads, the data for these are:
Overhead Annual cost for the coming year
$
Property costs 2,160,000
Quality control 668,000
Production set up costs 52,000
Total 2,880,000
The CB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times. Jola
Publishing will produce its annual output of 1,000,000 CBs in four production runs and approximately
10,000 TJs per month in each of 12 production runs.
Required:
(c) Calculate the cost per unit and the margin for the CB and the TJ using machine hours to absorb the
overheads.
(d) Calculate the cost per unit and the margin for the CB and the TJ using activity based costing principles
to absorb the overheads.

Jola publishing
a) The first thing to point out is that the overhead allocations to the two products have not changed by
that much. For example the CB has absorbed only $0·05 more overhead. The reason for such a small
change is that the overheads are dominated by property costs (75% of total overhead) and the ‘driver’ for
these remains machine hours once the switch to ABC is made.
Thus no difference will result from the switch to ABC in this regard.
The major effect on the cost will be for quality control. It is a major overhead (23% of total) and there is a
big difference between the relative number of machine hours for each product and the number of
inspections made (the ABC driver). The CB takes less time to produce than the TJ, due to the shortness
of the book. It will therefore carry a smaller amount of overhead in this regard. However, given the high
degree of government regulation, the CB is subject to ‘frequent’ inspections whereas the TJ is inspected
only rarely. This will mean that under ABC the CB will carry a high proportion of the quality control cost
and hence change the relative cost allocations.
The production set up costs are only a small proportion of total cost and would be, therefore, unlikely to
cause much of a difference in the cost allocations between the two products. However this hides the
very big difference in treatment. The CB is produced in four long production runs, whereas the TJ is
produced monthly in 12 production runs. The relative proportions of overhead allocated under the two

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overhead treatments will be very different. In this case the TJ would carry much more overhead under
ABC than under a machine hours basis of overhead absorption.

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(W2)Working for ABC overheads
Overheads recovery rates
Property costs= $2,160,000 / 120,000 = $18/hour
Quality control = $668,000 / 200 = 3340 per inspection
Production set up cost = $52,000 / 16 = $3250 per set up
Absorption of overheads
CB TJ
Property cost (18 x 100,000) 1800,000 (18 x 20,000) 360,000
Quality control (3340 x 180) 668,000 (3340 x 20) 601,200
Production set up (3250 x 4) 52,000 (3250 x 12) 13,000
Total overheads 2,414,200 465,800
Overheads per unit 2.41 3.88

Q4. An analysis of the company’s indirect production costs shows the following:
$ Cost driver
Machine setup costs 120,600 Number of batches
Material ordering costs 64,800 Number of supplier orders
General facility costs 337,500 Number of machine hours
The following additional data relate to each product:
Product W X Y
Prime cost £15 £24 £35
Machine hours per unit 5 8 7
Batch size (units) 500 400 1,000
Supplier orders per batch 4 3 5
Demand 8,000 6,000 5,000

Required:
(a) Calculate the full cost per unit of each product using Activity Based Costing. (8 marks)
(b) Explain how Activity Based Costing could provide information that would be relevant to the
management team when it is making decisions about how to improve KL’s profitability. (4 marks)
overhead recovery
rates
overhead cost driver recovery rates
machine set up cost 36 3350
material ordering cost 134 483.5820896
general facility cost 123000 2.743902439

W X Y
machine set up cost 33500 50250 16750
material ordering cost 30949.25 21761.19403 2417.91
general facility cost 109756.1 131707.3171 96036.59
absorb overheads 174205.4 203718.5111 115204.5
overheads per unit 21.77567 33.95308518 23.0409
prime cost 15 24 35
cost per unit 36.77567 57.95308518 58.0409

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Q5. Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic
whilst demand for product Z is relatively inelastic. Each product uses the same materials and the same
type of direct labour but in different quantities. For many years, the company has been using full
absorption costing and absorbing overheads on the basis of direct labour hours. Selling prices are then
determined using cost plus pricing. This is common within this industry, with most competitors applying
a standard mark-up.
Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000 units and
22,000 units respectively.
The budgeted direct costs of the three products are shown below:
Product X Y Z
$ per unit $ per unit $ per unit
Direct materials 25 28 22
Direct labour ($12 per hour) 30 36 24
In the next year, Duff Co also expects to incur indirect production costs of $1,377,400, which are
analysed as follows:
Cost pools $ Cost drivers
Machine set up costs 280,000 Number of batches
Material ordering costs 316,000 Number of purchase orders
Machine running costs 420,000 Number of machine hours
General facility costs 361,400 Number of machine hours
––––––––––
1,377,400
––––––––––
The following additional data relate to each product:
Product X Y Z
Batch size (units) 500 800 400
No of purchase orders per batch 4 5 4
Machine hours per unit 1.5 1.25 1.4
Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited
because of its use of cost plus pricing and the application of the standard mark-up. The finance director
has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter
the cost of the products and may therefore enable a different price to be charged.

Required:
(a) Calculate the budgeted full production cost per unit of each product using Duff Co’s current method
of absorption costing. All workings should be to two decimal places. (3 marks)
(b) Calculate the budgeted full production cost per unit of each product using activity based costing. All
workings should be to two decimal places. (11 marks)
(c) Discuss the impact on the selling prices and the sales volumes OF EACH PRODUCT which a change to
activity based costing would be expected to bring about. (6 marks)
(20 marks)

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Q6. Naceur makes three products A, B and C. Budgeted cost and production information for the coming
period is as follows:
Product A B C
Per thousand metres
Costs
Direct materials £120·00 £100·00 £60·00
Direct labour £42·00 £42·00 £28·00
Machine hours 6·00 hrs 6·00 hrs 4·00 hrs
Labour hours 0·1 hrs 0·1 hrs 0·02 hrs
Output in thousand metres 120 100 80
The three products are manufactured using the same production technology. They are usually produced
in production runs of 10,000 metres and sold to wholesalers in batches of 5,000 metres. The company
uses a cost plus pricing system and a gross margin of 20% on sales to calculate prices. Budgeted
production overhead is absorbed using a machine hour rate and the budgeted overhead for the coming
period has been analysed as follows:
£
Rates, rent, supervision, power and depreciation 26,000
Set up costs 15,000
Goods inwards 9,600
Finished goods inspection 5,250
Dispatch 9,750
Total £65,600
Budgeted machine hours for the period are 1,640 hours.
Required:
(a) Calculate the budgeted total cost per thousand metres for each product, showing clearly prime cost,
overhead cost and total cost; (5 marks)
(b) The sales manager of Naceur has complained that its main competitor is undercutting its prices for
products A and B by several pounds. Naceur’s price for product C on the other hand is lower than that of
the competitor. She believes these price differences are caused by their competitor using an activity-
based costing (ABC) system to cost products, and a cost plus pricing system with a mark-up of 20% on
total activity based cost to calculate prices. In an attempt to make Naceur’s costings more accurately
reflect the usage of resources by products you have ascertained that the cost drivers for the overhead
activities are as follows:
Cost Pool Cost driver Budgeted driver
activity for the period

Rates, rent supervision,

power and depreciation machine hours 1,640
Set up costs number of production runs 30
Goods inwards costs Number of requisitions 120
Finished goods inspection costs Number of production runs 30
Dispatch costs Number of sales orders 60
The number of requisitions raised by goods inwards was 40 for each product and the number of sales
orders was 60 (one order per batch sold).
Required:
(i) Calculate the budgeted cost driver rate for each overhead activity; (5 marks)
(ii) Calculate the budgeted total cost per thousand metres for each product using an activity-based
costing approach; (10 marks)
Answer : Overhead cost per thousand metre: 221·77 227·10 203·40

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c) absorption of overeheads
A B C
Rent (15.85 x (6/1000 x 120,000)* 11,412 9,510 5,072
Set up cost (500 x 120,000/10,000) 6,000 5,000 4,000
Goods inward cost (80 x 40) 3,200 3,200 3,200
Inspection cost (175 x 120,000/10,000) 2,100 1,750 1,400
Dispatch cost (162.5 x 120,000 / 5000) 3,900 3,250 2,600
Total overheads 26,612 22,710 16,272
Overheads per thousand meter 221.76 210.85 203.4
Prime cost 162.00 142.00 88.00
Cost per unit 383.77 369.10 291.40

*6/1000x120,000 will result in total hours required for A. alternatively it can also be calculated as
$15.85x120

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Q7. Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of
procedure incurs the following direct costs:
Procedure A B
$ $
Surgical time and materials 1,200 2,640
Anaesthesia time and materials 800 1,620
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply
dividing it by the number of procedures, then rounding the cost to the nearest 2 decimal places. Using
this method, the total cost is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance
director at BH to consider whether this alternative costing technique would bring any benefits to BH. He
has obtained an analysis of BH’s total overheads for the last year and some additional data, all of which
is shown below:
Cost Cost driver $
Administrative costs Administrative time per procedure 1,870,160
Nursing costs Length of patient stay 6,215,616
Catering costs Number of meals 966,976
General facility costs Length of patient stay 8,553,600
Total overhead costs 17,606,352
Procedure A B
No. of procedures 14,600 22,400
Administrative time per procedure (hours) 1 1·5
Length of patient stay per procedure (hours) 24 48
Average no. of meals required per patient 1 4
Required:
(a) Calculate the full cost per procedure using activity-based costing. (6 marks)
(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based
costing should be implemented at BH. (4 marks)
(10 marks)

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Q8. Admer owns several home furnishing stores. In each store, consultations, if needed, are undertaken
by specialists, who also visit potential customers in their homes, using specialist software to help
customers realise their design objectives. Customers visit the store to make their selections from the
wide range of goods offered, after which sales staff collect payment and raise a purchase order.
Customers then collect their self-assembly goods from the warehouse, using the purchase order as
authority to collect. Administration staff process purchase orders and also arrange consultations.
Each store operates an absorption costing system and costs other than the cost of goods sold are
apportioned on the basis of sales floor area.
Results for one of Admer’s stores for the last three months are as follows:
Department Kitchens Bathrooms Dining Rooms Total
£ £ £ £
Sales 210,000 112,500 ) 440,000 762,500
Cost of goods sold 163,000 1 37,500 176,000 276,500
Other costs 130,250 1 81,406) 113,968 325,624
––––––– ––––––– ––––––– ––––––––
Profit 116,750 1(6,406) 150,032 160,376
––––––– ––––––– ––––––– ––––––––
The management accountant of Admer is concerned that the bathrooms department of the store has
been showing a loss for some time, and is considering a proposal to close the bathrooms department in
order to concentrate on the more profitable kitchens and dining rooms departments. He has found that
other costs for this store for the last three months are made up of:
£ Employees
Sales staff wages 164,800 12
Consultation staff wages 124,960 4
Warehouse staff wages 130,240 6
Administration staff wages 130,624 4
General overheads (light, heat, rates, etc.) 175,000
––––––––
325,624
––––––––

He has also collected the following information for the last three months:
Department Kitchens Bathrooms Dining Rooms
Number of items sold 1,000 1,500 4,000
Purchase orders 1,000 900 2,500
Floor area (square metres) 16,000 10,000 14,000
Number of consultations 798 200 250
The management accountant believes that he can use this information to review the store’s
performance in the last three months from an activity-based costing (ABC) perspective.
Required:

13
(a) Discuss the management accountant’s belief that the information provided can be used in an
activity-based costing analysis. (4 marks)
(b) Explain and illustrate, using supporting calculations, how an ABC profit statement might be
produced from the information provided. Clearly explain the reasons behind your choice of cost drivers.
(8 marks)
(c) Evaluate and discuss the proposal to close the bathrooms department. (6 marks)
(d) Discuss the advantages and disadvantages that may arise for Admer from introducing activity-
based costing in its stores. (7 marks)
(25 marks)

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Q9. F Company supplies pharmaceutical drugs to drug stores. Although the company makes a
satisfactory return, the directors are concerned that some orders are profitable and others are not. The
management has decided to investigate a new budgeting system using activitybased costing principles
to ensure that all orders they accept are making a profit.
Each customer order is charged as follows. Customers are charged the list price of the drugs ordered
plus an additional charge for overheads. A profit margin is also added, but that does not form part of this
analysis and can therefore be ignored.
Currently F Company uses a simple absorption rate to absorb these overheads. The rate is calculated
based on the budgeted annual overhead costs divided by the budgeted annual total list price of the drugs
ordered.
An analysis of customers has revealed that many customers place frequent small orders with each order
requesting a variety of drugs. The management of F Company has examined more carefully the nature of
its overhead costs, and the following data have been prepared for the budget for next year:
Total list price of drugs supplied $8m
Number of customer orders 8,000
Overhead costs $000 Cost driver
Invoice processing 280 See Note 2
Packing 220 Size of package – see Note 3
Delivery 180 Number of deliveries – see Note 4
Other overheads 200 Number of orders
Total overheads 880
Notes:
1. Each order will be shipped in one package and will result in one delivery to the customer and one invoice
(an order never results in more than one delivery).

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2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines each year. It is
estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are related
to the number of invoice lines.
3. Packing costs are $32 for a large package, and $25 for a small package.
4. The delivery vehicles are always filled to capacity for each journey. The delivery vehicles can carry
either 6 large packages or 12 small packages (or appropriate combinations of large and small packages).
It is estimated that there will be 1,000 delivery journeys each year, and the total delivery mileage that is
specific to particular customers is estimated at 350,000 miles each year. $40,000 of delivery costs are
related to loading the delivery vehicles and the remainder of these costs are related to specific delivery
distance to customers.
The management has asked for two typical orders to be costed using next year’s budget data, using the
current method, and the proposed activity-based costing approach.
Details of two typical orders are shown below:
Order A Order B
Lines on invoice 2 8
Package size Small Large
Specific delivery distance 8 miles 40 miles
List price of drugs supplied $1,200 $900
Required:
(a) Calculate the charge for overheads for Order A and Order B using:
(i) the current system; and (3 marks)
(ii) the activity-based costing approach. (12 marks)
(b) Write a report to the management of F Company in which you assess the strengths and weaknesses
of the proposed activity-based costing approach for F company; (5 marks)

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c) The present system is very simple but makes no attempt to link the overhead costs to
the factors which cause those costs. The present system simply charges all orders a
blanket rate of 11% on list price.
The proposed ABC system is still very simple but makes some effort to determine the cost drivers, i.e.
those factors which are most closely related to the way in which the costs of an activity are incurred.
For instance, it has been found for the invoice processing costs that the costs are affected by the
number of invoices issued, but also by how complicated the invoices are, i.e. how many different lines
there are on the invoice.

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Charging out the invoice processing costs on the basis of the two cost drivers above will result in
more accurate costs and will give more information about the cost structure and the cost drivers in
order to improve cost control. Once the cost structure is known, efforts can be made to reduce the
volume of activity of the cost driver (e.g. the 28,000 invoice lines) and/or the cost of the cost driver
(e.g. the $7.50 per invoice line).
It is argued by ABC supporters that the better costs calculated under ABC can then be used as the
basis for fixing selling prices and that these selling prices relate to the true cost of the order and thus
will prevent loss-making orders.
F Company can also compare the true costs of the different elements of the system against the costs
of outsourcing.
The more accurate costs determined under an ABC system can be used to justify selling prices or
selling price increases to customers.
Whilst it is undoubtedly true that ABC gives more accurate costs, it is also true that it will be more
expensive to implement and the benefit may not exceed the cost.
The proposed system, here, is still very simple and it is possible that a more detailed analysis would
provide further useful information.
ABC attempts to find the cost driver for each type of cost and thus avoid the arbitrariness of
absorption costing but, here, some costs are still charged on an arbitrary basis, e.g. the other
overheads.

Q10. Navier Aerials Co (Navier) manufactures satellite dishes for receiving satellite television signals.
Navier supplies the major satellite TV companies who install standard satellite dishes for their
customers. The company also manufactures and installs a small number of specialised satellite dishes
to individuals or businesses with specific needs resulting from poor reception in their locations.
The Chief Executive Officer (CEO) wants to initiate a programme of cost reduction at Navier. His plan is
to use activity-based management (ABM) to allocate costs more accurately and to identify non-value
adding activities. The first department to be analysed is the customer care department, as it has been
believed for some time that the current method of cost allocation is giving unrealistic results for the two
product types.
At present, the Finance Director (FD) absorbs the cost of customer care into the product cost on a per
unit basis using the data in Table 1. He then tries to correct the problem of unrealistic costing, by making
rough estimates of the costs to be allocated to each product based on the operations director's
impression of the amount of work of the department. In fact, he simply adds $100 above the standard
absorbed cost to the cost of a specialised dish to cover the assumed extra work involved at customer
care.
The cost accountant has gathered information for the customer care department in Table 2 from
interviews with the finance and customer care staff. She has used this information to correctly
calculate the total costs of each activity using activity-based costing in Table 3. The CEO wants you, as a
senior management accountant, to complete the work required for a comparison of the results of the
current standard absorption costing to activity-based costing for the standard and specialised dishes.
Once this is done, the CEO wants you to consider the implications for management of the customer care
process of the costs of each activity in that department. The CEO is especially interested in how this
information may impact on the identification of non-valued added activities and quality management at
Navier.

Navier Dishes (information for the year ending 31 March 2013)

Customer care (CC) department
Table 1: Existing costing data
$'000
Salaries 400
Computer time 165

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Telephone 79
Stationery and sundries 27
Depreciation of equipment 36
707
Note. CC cost is currently allocated to each dish based on 16,000 orders a year, where each order
contains an average of 5·5 dishes.

Table 2: Activity-costing data

Activities of CC dept Staff Comments
time
Handling enquiries and preparing quotes for
potential orders 40% relates to 35,000 enquiries/quotes per year
Receiving actual orders 10% relates to 16,000 orders in the year
Customer credit checks 10% done once an order is received
Supervision of orders through manufacture
to delivery 15%
Complaints handling 25% relates to 3,200 complaints per year

Notes:
1. Total department cost is allocated using staff time as this drives all of the other costs in the
department.
2. 90% of both enquiries and orders are for standard dishes. The remainder are for specialised
dishes.
3. Handling enquiries and preparing quotes for specialised dishes takes 20% of staff time
allocated to this activity.
4. The process for receiving an order, checking customer credit and supervision of the order is the
same for both a specialised dish order and a standard dish order.
5. 50% of the complaints received are for specialised dish orders.
6. Each standard dish order contains an average of six dishes.
7. Each specialised dish order contains an average of one dish.

Table 3: Activity-based costs

Total Standard Specialised
$ $ $
Handling enquiries and preparing quotes 282,800 226,240 56,560
Receiving actual orders 70,700 63,630 7,070
Customer credit checks 70,700 63,630 7,070
Supervision of order through manufacture
to delivery 106,050 95,445 10,605
Complaints handling 176,750 88,375 88,375
–––––––– –––––––– ––––––––
Total 707,000 537,320 169,680
–––––––– –––––––– ––––––––

For theory: read Advance Managerial Accounting/Section 1.3

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