Statement of Operating expenses (External reporting purposes)

Total
$ Cabinets
Units 500
Sales 470000 470000 940
Less: Cost of Goods Sold
- Direct material 120000 120000 240
- Indirect Manufacturing 110000 110000 220
Total cost of goods sold 230000 230000 460
Gross profit 240000 240000 480
Selling Expenses
- Sales Expenses 47000 47000 94
- Distribution 30000 30000 60
Total Selling Expenses 77000 77000 154
Profits before Admin expenses 163000 163000 326
Admin Salaries 40000 40000 80
Other Admin expenses 60000 60000 120
Total Admin Expenses 100000 100000 200
Net Operating Income 63000 63000 126

Case: 1:
The Company manufactures only cabinets. Situation 1 Situation 2
Average selling price per cabinet 940 895.4
Average total cost per cabinet 814 814
Net income per cabinet 126 81.4

Statement of Operating expenses (External reporting purposes)

Total Cost Object
$ Cabinets Tables Chairs
Units 500 800 1500
Sales 470000 280000 560 100000 125 90000 60
Less: Cost of Goods Sold 0 0
- Direct material 120000 50000 100.00 30000 37.50 40000 26.66667 Directly identified
- Indirect Manufacturing 110000 79200 158.40 22000 27.50 8800 5.866667 Indirect: Allocation based on Machine hours
Total cost of goods sold 230000 129200 258.40 52000 65.00 48800 32.53333
Gross profit 240000 150800 301.60 48000 60.00 41200 27.46667
Selling Expenses
- Sales Expenses 47000 28000 56.00 10000 12.50 9000 6 Incentives; directly traced to products
- Distribution 30000 16000 32.00 8000 10.00 6000 4 Inndirect; allocation based on weights
Total Selling Expenses 77000 44000 88.00 18000 22.50 15000 10
Profits before Admin expenses 163000 106800 213.60 30000 37.50 26200 17.46667
Admin Salaries 40000 21053 42.11 10526 13.16 8421 5.614 Allocation based on no of people in each sesion
Other Admin expenses 60000 28125 56.25 18750 23.44 13125 8.75 Allocation based on area occupied
Total Admin Expenses 100000 49178 98.36 29276 36.60 21546 14.36
Net Operating Income 63000 57622 115.24 724 0.90 4654 3.10
Net operating margin% 13.4 20.6 444.8 0.7 124.1 5.2 56.9
Machine Hours 25000 18000 5000 2000
Machine hour rate 4.4
Weights ( In pounds) 15000 8000 4000 3000
Rate per pound of distribution 2

No of employees 190 100 50 40

Rate of admin salary per employee 210.53

Area occupied ( sq feet) 32000 15000 10000 7000

Admins exp rate per sq feet 1.875

Case: 1:
The Company manufactures only cabinets.
Average selling price per cabinet 470
Average total cost per cabinet 444.76
Net income per cabinet 25.24
Allocation of Indirect resource cost - A simple example
Product lines
Cost Hours 1 2 3
Sales 4,600,000 1,000,000 1,600,000 2,000,000
Resources used
Employee 1 - Procurement 900000 100
Employee 2 - Sales 1200000 100
Employee 3 - operations 1500000 100
Total Cost (Allocated based on sales) 3600000 300 3600000 782609 1252174 1565217

Activity analysis
Resource: Employee 1
Resource Cost 900000 Cost
Puchase order processing 40% 40 360000
ventor development 60% 60 540000
Total hours 100% 100 900000

Resouce: Employee 2
Resource Cost 1200000
Customer order processing 60% 60 720000
Promotional activites 40% 40 480000
Total hours 100 1200000

Resource: Employee 3
Resource Cost 1500000
Supervision 70% 70 1050000
Breakdowns and trouble shooting 30% 30 450000
Total hours 100 1500000 3600000

Product lines
Activity drivers associated to product lines Units 1 2 3
No of Purchase orders Nos 1100 500 400 200
No of vendors developed Nos 60 30 20 10
Customer order processing Nos 675 450 150 75
No of promotiional activities undertaken Nos 15 10 5 0
Employees for supervision Nos 225 100 75 50
No of break downs Nos 15 10 5 0

Acitivty Cost allocated to product lines Product lines

Total 1 2 3
Purchase ordering 360000 163636 130909 65455
Vendor development 540000 270000 180000 90000
Customer order processing 720000 480000 160000 80000
Promotional activties 480000 320000 160000 0
Supervision 1050000 466667 350000 233333
450000 300000 150000 0
Allocation on the basis of Activity based Costing 3600000 2000303 1130909 468788
asystem Product
Cell Phone
Assignment Total Pen casings
Casings
Sales Direct 440000 360000 80000
Less:
Cost of Goods Sold
Direct Materials Direct 150000 135000 15000
Direct Labor Direct 34500 22500 12000
Other Production cost Indirect 270000 243000 27000
Total Production Cost 454500 400500 54000
Gross Profit -14500 -40500 26000
Direct labour hours Cost drivers 5000 4500 500
Direct labout hour rate 54
Gross Profit Margin% -3.30 -11.25 32.50
Unallocated Costs 50000
(Unable to relate to the cost objects)

Activity Based costing

Step 1
identify the activity, Activity Cost pools, and Activity Meansures
Step2
Assign overheads cost to Activity Cost pools
Find out the appropriate drivers to allocate the cost to the activities
Find out the acitivity rate based on the driver related closely to the end cost object.
Step3
Identify the drivers relating to the ned cost objects
Assign the activity cost to the cost object based on the drivers
 Acivity/ Activity Cost pools Acivity/ Activity Cost pools
Production Production
Processing support Processing support
State 1 Allocation Acitvity Measures Cost
Resources % Cost
Plant and Machinery area occupied 216000 75% 25% 162000 54000
Engineers & CAD equipment 12/48 min for 60 min 54000 20% 80% 10800 43200
Total 270000 172800 97200

Stage 2 Allocation Cost Object

Activity Cell Phone Cell Phone
Activity / Activity Pool Activity drivers Nos Pen casings Pen castings
Rate Casings Casings
Processing No of labour hours 5000 34.56 4500 500 155520 17280
Production Support No. of design parts 25 3888 5 20 19440 77760
Total 174960 95040

Income Statement Based on Activity Based

Cell Phone
Assignment Total Pen castings
Casings
Sales Direct 440000 360000 80000
Less:
Cost of Goods Sold
Direct Materials Direct 150000 135000 15000
Direct Labor Direct 34500 22500 12000
Processing activity Indirect 172800 155520 17280
Production support activity Indirect 97200 19440 77760
Total Indirect Production Cost 270000 174960 95040
Total Cost 454500 332460 122040
Gross Profit -14500 27540 -42040
Gross Profit Margin% 7.7 -52.6
Unallocated Costs 50000
(Unable to relate to the cost objects)
Net profit -64500