Direct materials and direct labour are the major elements of traditional cost accounting system.
The traditional system is suitable for those companies who produce goods in narrow range.
If company produces wide range of goods, overhead cost will be relatively higher to the direct cost.
And it may be difficult to allocation (share) fixed cost.
Activity based cost (ABC) was introduced by Robin Cooper in 1980 to resolves the difficulties of assigning overhead amount under traditional costing.
Then Robert S. Kaplan recommended it in 1988; it is recommended for:
· A wide range of products
· Product costing and profitability
· Distribution and controlling overheads appropriately (properly)
ABC helps to better understanding about overhead cost.
It helps to allocation overheads in systematic and scientific way.
Activities are transaction, events, tasks or unit of work for producing goods.
ABC is also called transaction based costing.
Definition of ABC
According to Professor Robin Cooper and Robert S. Kaplan, “ABC systems calculate the costs of individual activities and assign/allocate costs to cost objects such as product and service on the basis of activities and assign costs to cost each product or service.”
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Machine expenses |
xxxx |
Machine hour |
xxx |
xxx |
Set up cost |
xxxx |
Production runs |
xxx |
xxx |
Store receiving cost |
xxxx |
Requisition raised |
xxx |
xxx |
Quantity control |
xxxx |
Production runs |
xxx |
xxx |
Materials handling |
xxxx |
Order executed |
xxx |
xxx |
Cost Statement under ABC
Particulars |
X |
Y |
Z |
||
Direct materials |
[Output × Usage × MCPU] |
xxxx |
xxxx |
xxxx |
|
Direct labour |
[Output × DLH × $] |
xxxx |
xxxx |
xxxx |
|
Prime cost |
xxxx |
xxxx |
xxxx |
||
Add: Overhead (based on ABC) |
|
|
|
||
Machine expenses |
[Machine hour × $] |
xxxx |
xxxx |
xxxx |
|
Set up cost |
[Production runs × $] |
xxxx |
xxxx |
xxxx |
|
Store receiving cost |
[Requisition raised × $] |
xxxx |
xxxx |
xxxx |
|
Quantity control |
[Production runs × $] |
xxxx |
xxxx |
xxxx |
|
Materials handling |
[Order executed × $] |
xxxx |
xxxx |
xxxx |
|
Total cost |
$xxxxx |
$xxxxx |
$xxxxx |
||
Output |
xxxx |
xxxx |
xxxx |
||
Cost per unit = Total cost ÷ Output |
$xx |
$xx |
$xx |
||
Limitation of Activity Based Costing
Following are the main limitations of ABC:
ABC is more complex than traditional costing system.
It is difficult to identify overall activities.
It is difficult to select most suitable cost driver for each expenses or overhead.
It is not suitable for small manufacturing industries because it is expensive.
Working procedure of activity based costing system
Step 1, Identify the major activities of an organization
Step 2, Identify a cost driver (cost indicator) for each activities or operation
Step 3, Create a cost center (cost pool) for each major activity or operation
Step 4, Trace (allocate) the cost of the activities or operation to the final product
Step 1, Identify the major activities of an organization
To prepare finished goods, every manufacturing company needs some basic components like materials, materials handling, work in progress, machine operation, production scheduling, production runs, set-ups, employees’ related activities, customer’s order completing dispatch of goods etc.
Step 2, Identify a cost driver (cost indicator) for each activities or operation
Cost is influenced/effected by different factors.
After identification of the major activities, those effecting factors also should be identified; they are:
SN |
Activities or Transactions |
Cost Drivers |
1. |
Material procurement, Order execution |
No. of order |
2. |
Material handling |
No. of order executed, No. of movement |
3. |
Store |
No. of batch, Requisition raised |
4. |
Materials handling and dispatch |
Order executed, No. materials component, volume |
5. |
Dispatch of goods |
No. of dispatches |
6. |
Schedule cost, set up cost |
Production runs |
7. |
Materials inspections |
No. of inspections |
8 |
Repair and maintenance, short term variable cost |
Machine hours |
9. |
Power |
Horse power |
10. |
Production scheduling |
No. of production scheduling |
11. |
Engineering cost |
No. of set up, No. of product change, No. of tool change |
Traditional costing
The tradition costing system was designed decades ago for costing.
There are two types of distribution under traditional costing system.
They are primary and secondary distribution of overhead.
Under primary costing, direct materials, direct labour and direct overhead are calculated.
Under secondary costing, labour hour based or machine hour based overhead are calculated.
Activity based costing
ABC helps to better understanding about overhead cost.
It helps to allocation overheads in systematic and scientific way.
Activities are transaction, events, tasks or unit of work for producing goods.
ABC is also called transaction based costing.
Traditional Costing System vs Activity Based Costing
Bases |
Traditional Costing System |
Activity Based Costing |
Cost driver |
There is a single cost driver in traditional costing system |
There are multiple cost drivers in activity based costing. |
Usage |
It is used when labour or machine cost is the large portion of the product cost. |
It is used when technology is the large portion of the product cost. |
Costing method |
It is more expensive costing method. |
It is less expensive costing method. |
Scope |
Traditional costing can be used only for manufacturing overheads. |
ABC can be used in manufacturing as well as non-manufacturing overheads like administration and selling. |
Reporting |
The values cannot be used in reports of external reporting. |
The values can be used in external financial statements. |
Implement |
It is straightforward and easy to implement. |
It is difficult to implement and requires time and effort. |
Step 3, Create a cost center (cost pool) for each major activity or operation
After finding out cost driver, cost driver rate should be calculated.
Cost driver rate = Related overhead ÷ Related total overhead
Step 4, Trace (allocate, distribution) the cost of the activities
After finding out cost driver rate, those should be allocated according to their nature or basis.
Overhead or activity = Cost driver x Cost driver rate
Keep in Mind (KIM)
According to CIMA, ‘Cost driver is any factor which causes a change in the cost of an activity”. |
Examples: |
In marketing, cost drivers are number of advertisements, number of sales personnel etc. |
In customer service, cost drivers are number of service calls attended, number of staff in service department, number of warranties handled, Hours spent on servicing etc. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
ABC Manufacturing Company (P) Ltd has following data:
Activities |
Overhead (in $/₹/Rs) |
Cost driver |
Procurement cost |
20,000 |
No. of order |
Repair and maintenance |
60,000 |
Machine hours |
Set up cost |
18,000 |
No. of production runs |
Materials handling |
12,000 |
No. of order executed |
Output and relevant data are:
Products |
Output units |
No. of order |
Machine hours |
Production runs |
No. of order executed |
A |
1,000 |
40 |
15,000 |
3 |
200 |
B |
1,500 |
60 |
10,000 |
5 |
400 |
Required: (under ABC) (1) Cost driver rate; (2) Total overhead; (3) Overhead rate
[Answer: CDR: $200; $2.40; $2,250; $20;
Total overhead: A = $54,750; B = $22,250;
Overhead rate: A = $54.75; B = $36.83]
SOLUTION:
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Procurement cost |
20,000 |
No. of order |
100 |
200.00 |
Repair and maintenance |
60,000 |
Machine hours |
25,000 |
2.40 |
Set up cost |
18,000 |
No. of production runs |
8 |
2,250.00 |
Materials handling |
12,000 |
No. of order executed |
600 |
20.00 |
Working note for total cost driver:
No. of order |
Machine hours |
Production runs |
No. of order executed |
= A + B |
= A + B |
= A + B |
= A + B |
= 40 + 60 |
= 15,000 + 10,000 |
= 3 + 5 |
= 200 + 400 |
= 100 |
= 25,000 |
= 8 |
= 600 |
Cost Statement under ABC
Particulars |
A |
B |
|
Direct materials |
[Output × Usage × MCPU] |
xxxx |
xxxx |
Direct labour |
[Output × DLH × $xx] |
xxxx |
xxxx |
|
Prime cost |
xxxx |
xxxx |
Add: Overhead |
(based on ABC) |
|
|
Procurement cost |
[No. of order × $200] |
8,000 |
12,000 |
Repair and maintenance |
[Machine hours × $2.40] |
36,000 |
24,000 |
Set up cost |
[No. of production runs × $2,250] |
6,750 |
11,250 |
Materials handling |
[No. of order executed × $20] |
4,000 |
8,000 |
Total overhead |
$54,750 |
$55,250 |
|
Output |
1,000 |
1,500 |
|
Overhead per unit = Total overhead ÷ Output |
$54.75 |
$36.83 |
Keep in Mind (KIM)
Overhead for product A |
= CD x CDR |
|
|
Procurement cost |
[No. of order × $200] |
= 40 x $200 |
= $8,000 |
Repair and maintenance |
[Machine hours × $2.40] |
= 15,000 x $2.4 |
= $36,000 |
Set up cost |
[No. of production runs × $2,250] |
= 3 x $2,250 |
= $6,750 |
Materials handling |
[No. of order executed × $20] |
= 200 x $20 |
= $4,000 |
All overhead related to ABC is calculated as above. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
XYZ Manufacturing Company produces its two products in similar machine and process. The following information is available:
Particulars |
X |
Y |
|
Units produced |
6,000 |
8,000 |
|
Labour hour per unit |
1 |
2 |
|
Machine hour per unit |
4 |
2 |
|
Set up periods |
15 |
45 |
|
Order handling |
12 |
60 |
|
Cost incurred (in $/₹/Rs):
Production set up cost |
Order handling |
Machine activity |
Total overhead |
180,000 |
32,400 |
60,000 |
272,400 |
Required: (1) Cost driver rate; (2) Total overhead under ABC; (3) Overhead cost per units based ABC
[Answer: CDR = $3,000; $450 and $1.50]
Total overhead = $86,400 and $186,000;
Overhead CPU = $14.40 and $23.25]
SOLUTION:
Working note for total cost driver
No. of set up |
Order handling |
Machine hours |
= Output x LHPU |
|
= X + Y |
= X + Y |
X |
= 6,000 × 4 |
= 24,000 |
= 15 + 45 |
= 12 + 60 |
Y |
= 8,000 ×2 |
= 16,000 |
= 60 |
= 72 |
|
|
= 40,000 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Production Set up |
180,000 |
No. of set up |
60 |
3,000.0 |
Order handling |
32,400 |
Order handling |
72 |
450.0 |
Machine activity |
60,000 |
Machine hours |
40,000 |
1.5 |
Cost Statement under Activity Based Cost (ABC)
Particulars |
Products |
||
|
X = 6,000 |
Y = 8,000 |
|
Direct materials |
xxxx |
xxxx |
|
Direct labour |
xxxx |
xxxx |
|
Prime cost |
xxxx |
xxxx |
|
Add: Overhead (based on ABC): |
|
|
|
Production set up |
[No. of set up × $3,000] |
45,000 |
135,000 |
Order handling |
[Order handling × $450] |
5,400 |
27,000 |
Machine activity |
[Machine hours × $1.50] |
36,000 |
24,000 |
Total overhead |
$86,400 |
$186,000 |
|
Output |
6,000 |
8,000 |
|
Overhead cost per units = Total overhead ÷ Output |
$14.40 |
$23.25 |
Keep in Mind (KIM)
If prime cost is available, sum of prime cost and overhead is called total cost. |
If prime cost is not available, sum of overhead is called total overhead. |
Upto prime cost both traditional costing and ABC costing have same value. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
Eshna Manufacturing produces its products in similar process. The expenses for the period were:
Cost overhead |
Amount |
Cost driver |
Machine expenses |
99,000 |
Machine hours |
Schedule cost |
165,000 |
Production runs |
Set up cost |
96,000 |
Production runs |
Materials handling |
137,700 |
No. components |
|
497,700 |
|
Four products were produced by workers. Wage rate per hour $12
Additional information:
Particulars |
A |
B |
C |
D |
Output in units |
500 |
800 |
1,000 |
1,500 |
No. of production runs |
5 |
7 |
8 |
10 |
DLH per unit |
3 |
5 |
3 |
5 |
Machine hour per unit |
4 |
6 |
4 |
6 |
Materials cost per unit |
60 |
40 |
50 |
20 |
No. of materials handling |
10 |
8 |
12 |
15 |
Required: Total cost and cost per unit applying:
(a) Conventional costing using machine hour; (b) ABC using suitable cost driver
[Answer: (a) Total cost: A = $98,280; B = $200,672; C = 186,560; D = $346,260;
CPU: A = $196.50; B = $250.84; C = $186.56; D = $230.84;
(b) Total cost: A = $132,100; B = $189,380; C = 212,320; D = $297,900;
CPU: A = $264.20; B = $236.73; C = $212.32; D = $198.60]
SOLUTION:
Given and working note:
Total MH |
= Output x MHPU |
Machine hour rate |
|
A |
= 500 x 4 |
= 2,000 |
= Total overhead ÷ Total MH |
B |
= 800 x 6 |
= 4,800 |
= $497,700 ÷ 19,800 MH |
C |
= 1000 x 4 |
= 4,000 |
= $25.14 |
D |
= 1,500 x 6 |
= 9,000 |
|
|
|
19,800* |
|
Cost Statement under Conventional Costing
Particulars |
A = 500 |
B = 800 |
C = 1,000 |
D = 1,500 |
Direct materials [Output x MCPU] |
30,000 |
32,000 |
50,000 |
30,000 |
Direct labour [Output x DLH x $12] |
18,000 |
48,000 |
36,000 |
90,000 |
Prime cost |
48,000 |
80,000 |
86,000 |
120,000 |
Add: Overhead (based on machine hour) |
|
|
|
|
[Machine hour x Machine hour rate] |
50,280 |
120,672 |
100,560 |
226,260 |
Total cost |
$98,280 |
$200,672 |
$186,560 |
$346,260 |
Output |
500 |
800 |
1,000 |
1,500 |
Cost per unit = Total cost ÷ Output |
$196.56 |
$250.84 |
$186.56 |
$230.84 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Machine expenses |
99,000 |
Machine hour |
19,800* |
5 |
Schedule cost |
165,000 |
Production runs |
30 |
5,500 |
Set up cost |
96,000 |
Production runs |
30 |
3,200 |
Materials handling |
137,700 |
No. of Materials handling |
45 |
3,060 |
Working note for total cost driver:
Total MH |
= Output x MHPU |
|
Production runs |
No. of Materials handling |
A |
= 500 x 4 |
= 2,000 |
= A + B + C + D |
= A + B + C + D |
B |
= 800 x 6 |
= 4,800 |
= 5 + 7 + 8 + 10 |
= 10 + 8 + 12 + 15 |
C |
= 1000 x 4 |
= 4,000 |
= 30 |
= 45 |
D |
= 1,500 x 6 |
= 9,000 |
|
|
|
|
19,800* |
|
|
Cost Statement under ABC
Particulars |
A = 500 |
B = 800 |
C= 1,000 |
D = 1,500 |
|
Direct materials [Output × MCPU] |
30,000 |
32,000 |
50,000 |
30,000 |
|
Direct labour [Output × DLH × $12] |
18,000 |
48,000 |
36,000 |
90,000 |
|
Prime cost |
48,000 |
80,000 |
86,000 |
120,000 |
|
Add: Overhead (based on ABC) |
|
|
|
|
|
Machine expenses |
[Machine hour × $5] |
10,000 |
24,000 |
20,000 |
45,000 |
Schedule cost |
[Production runs × $5,500] |
27,500 |
38,500 |
44,000 |
55,000 |
Set up cost |
[Production runs × $3,200] |
16,000 |
22,400 |
25,600 |
32,000 |
Materials handling |
[No. of materials handling × $3,060] |
30,600 |
24,480 |
36,720 |
45,900 |
Total cost |
$132,100 |
$189,380 |
$212,320 |
$297,900 |
|
Output |
500 |
800 |
1,000 |
1,500 |
|
Cost per unit = Total cost ÷ Output |
$264.20 |
$236.73 |
$212.32 |
$198.60 |
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PROBLEM: 2D
Details of three products and related information are given below by Maxwell Manufacturing Company on 31st December:
Particulars |
X |
Y |
Z |
Volume in units |
420 |
280 |
560 |
Direct materials cost per unit (MCPU) |
50 |
60 |
30 |
Direct labour cost per unit (LCPU) |
25 |
19 |
15 |
Machine hour per unit |
5 |
4 |
3 |
Selling price per unit |
430 |
400 |
300 |
Additional information:
a. The products are produced in similar process in a production run of 70 units each.
b. Requisition raised from the store for product X, Y and Z in 10, 15 and 20 respectively.
c. The numbers of order executed was in the batch of 20 units each totaling 63
The production overhead for the period was:
Items |
Amount |
Cost driver |
Machine expenses |
36,750 |
Machine hour |
Set up cost |
101,430 |
Production runs |
Store receiving cost |
78,520 |
Requisition raised |
Quantity control |
36,000 |
Production runs |
Materials handling |
97,650 |
Order executed |
Required: (1) Conventional costing using machine hour and profit (loss)
(2) Cost driver rate; (3) ABC using suitable cost driver and profit (loss)
[Answer: (1) Total cost: X = $181,650; Y = $102,200; Z = 138,600;
Profit (Loss): X = ($1,050); Y = $9,800; Z = $29,400;
(2) CDR: $7.50; $5,635; $1,744.89; $2,000; $1,550;
(3) Total cost: X = $143,059; Y = $108,933; Z = 170,458;
Profit (Loss): X = $37,541; Y = $3,067; Z = ($2,458)]
SOLUTION:
Cost Statement under Conventional Costing
|
X = 420 |
Y = 280 |
Z = 560 |
Direct materials [Output x MCPU] |
21,000 |
16,800 |
16,800 |
Direct labour [Output x LCPU] |
10,500 |
5,320 |
1,620 |
Prime cost |
31,500 |
22,120 |
18,480 |
Add: Overhead (based on machine hour) |
|
|
|
[Machine hour x Machine hour rate] |
150,150 |
80,080 |
120,120 |
Total cost |
$181,650 |
$102,200 |
$138,600 |
Sales = Output x SPPU |
180,600 |
112,000 |
168,000 |
Profit (loss) = Sales – Total cost |
($1,050) |
$9,800 |
$29,400 |
Given and working note:
Machine hour |
= Output x MHPU |
|
Machine hour rate |
X |
= 420 x 5 |
= 2,100 |
= Total overhead ÷ Total MH |
Y |
= 280 x 4 |
= 1,120 |
= $350,350 ÷ 4,900 MH |
Z |
= 560 x 3 |
= 1,680 |
= $71.50 |
|
Total MH |
= 4,900* |
|
Working note for cost driver rate:
Production runs = Output ÷ 70 units |
Requisition raised |
Order executed = Output ÷ 20 units |
||||
X |
= 420 ÷ 70 |
= 6 |
= X + Y + Z |
X |
= 420 ÷ 20 |
= 21 |
Y |
= 280 ÷ 70 |
= 4 |
= 10 + 15 + 20 |
Y |
= 280 ÷ 20 |
= 14 |
Z |
= 560 ÷ 70 |
= 8 |
= 45 |
Z |
= 560 ÷ 20 |
= 28 |
|
|
= 18 |
|
|
|
= 63 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Machine expenses |
36,750 |
Machine hour |
4,900 |
7.50 |
Set up cost |
101,430 |
Production runs |
18 |
5,635.00 |
Store receiving cost |
78,520 |
Requisition raised |
45 |
1,744.89 |
Quantity control |
36,000 |
Production runs |
18 |
2,000.00 |
Materials handling |
97,650 |
Order executed |
63 |
1,550.00 |
Cost Statement under ABC
Particulars |
X = 420 |
Y = 280 |
Z = 560 |
|
Direct materials [Output × MCPU] |
21,000 |
16,800 |
16,800 |
|
Direct labour [Output × LCPU] |
10,500 |
5,320 |
1,620 |
|
Prime cost |
31,500 |
22,120 |
18,480 |
|
Add: Overhead (based on ABC) |
|
|
|
|
Machine expenses |
[Machine hour × $7.50] |
15,750 |
8,400 |
12,600 |
Set up cost |
[Production runs × $5,635] |
33,810 |
22,540 |
45,080 |
Store receiving cost |
[Requisition raised × $1,744.89] |
17,449 |
26,173 |
34,898 |
Quantity control |
[Production runs × $2,000] |
12,000 |
8,000 |
16,000 |
Materials handling |
[Order executed × $1,550] |
32,550 |
21,700 |
43,400 |
Total cost |
$143,059 |
$108,933 |
$170,458 |
|
Sales = Output x SPPU |
180,600 |
112,000 |
168,000 |
|
Profit (loss) = Sales – Total cost |
$37,541 |
$3,067 |
($2,458) |
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PROBLEM: 2E
Details of three products and related information are given below by ABC Manufacturing Company on 31st December:
Particulars |
A |
B |
C |
Production units |
2,000 |
1,000 |
1,000 |
Direct materials ($per kg) |
20 |
10 |
30 |
Direct labour (minute per unit) |
15 |
30 |
60 |
Batches of materials |
5 |
6 |
9 |
Machine hours per unit |
0.50 |
0.40 |
0.25 |
Materials dispatch (in 100 units pack each)
Wage rate per hour $20
Direct expenses is 50% of direct labour
Overhead rate $25.50 per hour based on labour hours
Cost and cost drivers:
Cost items |
Cost drivers |
% of total overhead |
Materials receipt and inspection |
No. of batches |
40% |
Process power |
Machine hours |
25% |
Materials handling |
No. of materials dispatch |
35% |
Required:
(a) Total overhead and apportionment of overhead; (c) Total cost and cost per unit under volume based costing
(c) Cost driver rate; (d) Total cost and cost per unit under activity based costing
[Answer: (a) Total overhead $51,000 and $20,400; $12,750; $17,850;
(b) Total cost: A = $66,250; B = $46,250; C = $72,500;
CPU: A = $33.13; B = $46.25; C = $72.50;
(c) CDR: $1,020; $7.727; $446.25;
(d) Total cost: A = $76,752; B = $48,674; C = $65,574;
CPU: A = $38.38; B = $48.67; C = $65.57]
SOLUTION:
Labour hours |
= Output x LHPU |
|
|
|
A |
= 2,000 x 15/60 |
= |
500 |
|
B |
= 1,000 x 30/60 |
= |
500 |
|
C |
= 1,000 x 60/60 |
= |
1,000 |
|
|
|
|
2,000 hours |
|
Total overhead
Labour hour rate |
= |
Total overhead ÷ Total labour hours |
25.50 |
= |
Total overhead ÷ 2,000 hours |
25.50 × 2,000 |
= |
Total overhead |
Total overhead |
= |
$51,000 |
Apportionment of overhead
Materials receipt and inspection |
= $51,000 @ 40% |
= 20,400 |
Process power |
= $51,000 @ 25% |
= 12,750 |
Materials handling |
= $51,000 @ 35% |
= 17,850 |
|
|
$51,000 |
Cost Statement under Conventional Costing
Particulars ↓ Output ® |
A = 2,000 |
B = 1,000 |
C = 1,000 |
|
Direct materials |
[Output x MCPU] |
40,000 |
20,000 |
20,000 |
Direct labour |
[Output x LCPU x $20] |
10,000 |
10,000 |
20,000 |
Direct expenses |
[50% of direct labour] |
5,000 |
5,000 |
10,000 |
Prime cost |
55,000 |
35,000 |
50,000 |
|
Add: Overhead (based on labour hour) |
|
|
|
|
[Labour hours x $22.50] |
11,250 |
11,250 |
22,500 |
|
Total cost |
66,250 |
46,250 |
72,500 |
|
Output |
2,000 |
1,000 |
1,000 |
|
Cost per unit = Total cost ÷ Output |
33.13 |
46.25 |
72.50 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Materials receipt |
20,400 |
No. of batches |
20 |
1,020.000 |
Process power |
12,750 |
Machine hours |
1,650 |
7.727 |
Materials handling |
17,850 |
No. of materials dispatch |
40 |
446.250 |
Working note for total cost driver
No. of batches
= A + B + C
= 5 + 6 + 9
= 20
Machine hours = Output x MHPU |
No. of dispatches = Output ÷ 100 units |
|||||
A |
= 2,000 x 0.50 |
= |
1,000 |
A |
= 2,000 ÷ 100 |
= 20 |
B |
= 1,000 x 0.40 |
= |
400 |
B |
= 1,000 ÷ 100 |
= 10 |
C |
1,000 x 0.25 |
= |
250 |
C |
= 1,000 ÷ 100 |
= 10 |
|
|
|
1,650 hours |
|
|
= 40 |
Cost Statement under Activity Based Costing
Particulars ↓ Output ® |
A = 2,000 |
B = 1,000 |
C = 1,000 |
|
Direct materials |
[Output × MCPU] |
40,000 |
20,000 |
20,000 |
Direct labour |
[Output × LCPU × $20] |
10,000 |
10,000 |
20,000 |
Direct expenses |
[50% of direct labour] |
5,000 |
5,000 |
10,000 |
Prime cost |
55,000 |
35,000 |
50,000 |
|
Add: Overhead (based on ABC) |
|
|
|
|
Materials R & I |
[No. of batches × $1,020] |
5,100 |
6,120 |
9,180 |
Process power |
[Machine hours × $7.727] |
7,727 |
3,091 |
1,932 |
Materials handling |
[No. of dispatches × $446.25] |
8,925 |
4,463 |
4,462 |
Total cost |
76,752 |
48,674 |
65,574 |
|
Output |
2,000 |
1,000 |
1,000 |
|
Cost per unit = Total cost ÷ Output |
38.38 |
48.67 |
65.57 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2F
Usha Components (P) Ltd has following data on 31st December:
Particulars ↓ Products ® |
X |
Y |
Z |
Output in units |
2,000 |
1,500 |
800 |
Direct materials per unit in $ |
10 |
6 |
12 |
Direct labour per unit in minute |
24 |
40 |
60 |
Wage rate per hour $24.
Other information:
Particulars ↓ |
X |
Y |
Z |
No. of materials batches |
10 |
15 |
10 |
Machine hours per unit |
6 |
3 |
2 |
Quantity of materials handling in units |
8,000 |
9,000 |
2,400 |
Cost and cost drivers:
Cost items |
Cost drivers |
Amount |
Materials receipt and inspection |
No. of batches |
32,410 |
Process power |
Machine hours |
30,770 |
Materials handling |
Quantity of materials handling |
25,220 |
Required: (1) Cost statement under traditional costing showing total cost and cost per unit.
(2) Cost statement under ABC showing total cost and cost per unit.
(3) Change cost per unit based on traditional costing.
[Answers:
|
|
A |
B |
C |
1 |
Total cost |
66,400 |
67,000 |
56,000 |
CPU |
33.20 |
44.67 |
70.00 |
|
2 |
Total cost |
79,260 |
66,240 |
43,900 |
CPU |
39.63 |
44.16 |
54.88 |
|
3 |
% change |
19.367% |
1.142% |
21.60% |
SOLUTION:
Given and working note:
DLH |
= Output × Minute ÷ 60 |
|
|
|
Labour hours rate |
X |
= 2,000 × 24 ÷ 60 |
= |
800 |
|
= Total overhead ÷ Total labour hours |
Y |
= 1,500 × 40 ÷ 60 |
= |
1,000 |
|
= $88,400 ÷ 2,600 hours |
Z |
= 800 × 60 ÷ 60 |
= |
800 |
|
= $34 |
|
|
|
2,600 |
|
|
Cost Statement under Traditional Costing
Particulars |
Products |
||
|
X = 2,000 |
Y= 1,500 |
Z = 800 |
Direct materials [Output × RMPU] |
20,000 |
9,000 |
9,600 |
Direct labour [DLH × $24] |
19,200 |
24,000 |
19,200 |
Prime cost |
39,200 |
33,000 |
28,800 |
Add: Overhead (based on labour hour): |
|
|
|
Labour expenses DLH × Labour hour rate) |
27,200 |
34,000 |
27,200 |
Total cost |
$66,400 |
$67,000 |
$56,000 |
Output |
2,000 |
1,500 |
800 |
Cost per units = Total cost ÷ Output |
$33.20 |
$44.67 |
$70.00 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Materials receipt and inspection |
32,410 |
No. of batch |
35 |
926.00 |
Process power |
30,770 |
Machine hours |
18,100 |
1.70 |
Materials handling |
25,220 |
Quantity of materials |
19,400 |
1.30 |
Working note for total cost driver
No. of batch |
Process power = Output × MH |
|
Quantity of materials |
||
X = 10 |
X = 2,000 × 6 |
= |
12,000 |
|
X = 8,000 |
Y = 15 |
Y = 1,500 × 3 |
= |
,500 |
|
Y = 9,000 |
Z = 10 |
Z = 800 × 2 |
= |
1,600 |
|
Z = 2,400 |
35 |
|
|
18,100 |
|
19,400 |
Cost Statement under Activity Based Cost (ABC)
Particulars |
Products |
|||
|
X = 2,000 |
Y = 1,500 |
Z = 800 |
|
Direct materials [Output × RMPU] |
20,000 |
9,000 |
9,600 |
|
Direct labour [DLH × $12] |
19,200 |
24,000 |
19,200 |
|
Prime cost |
39,200 |
33,000 |
28,800 |
|
Add: Overhead (based on ABC): |
|
|
|
|
Materials receipt and inspection |
[No. of batch × $926] |
9,260 |
13,890 |
9,260 |
Process power |
[Machine hours × $1.70] |
20,400 |
7,650 |
2,720 |
Materials handling |
[Qty. of materials × $1.30] |
10,400 |
11,700 |
3,120 |
Total cost |
$79,260 |
$66,240 |
$43,900 |
|
Output |
2,000 |
1,500 |
800 |
|
Cost per units = Total cost ÷ Output |
$39.63 |
$44.16 |
$54.88 |
Percentage change based on Traditional Costing
Particulars |
X |
Y |
Z |
Cost per unit as per traditional costing |
33.20 |
44.67 |
70.00 |
Cost per unit as per ABC |
39.63 |
44.16 |
54.88 |
Change or different |
6.43 |
0.51 |
15.12 |
% change based on traditional costing =(change ÷ traditional costing) × 100 |
19.367% |
1.142% |
21.60% |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2G
Ekta Copy Industries manufactures different sizes of diaries. The following data is related to four brands diaries on first week of January (amount in $/₹/Rs):
Particulars |
A |
B |
C |
D |
Output in units |
500 |
5,000 |
600 |
7,000 |
Paper cost per unit (direct materials) |
$5 |
$5 |
$16 |
$17 |
DLH per unit |
0.5 |
0.5 |
2 |
1.5 |
Machine hours per unit |
0.25 |
0.25 |
1 |
1.5 |
Labour cost per unit |
$6 |
$6 |
$6 |
$6 |
Total production overhead by account department as under (amount in $/₹/Rs):
Machine expenses |
37,425 |
|
Set up cost |
4,250 |
|
Materials ordering cost |
1,920 |
|
Materials handling cost |
10,260 |
|
Production runs |
8,520 |
|
Cost driver activities:
Activities |
A |
B |
C |
D |
No of set up |
1 |
6 |
2 |
8 |
No. of materials order |
1 |
4 |
1 |
4 |
No. of materials handling |
2 |
10 |
3 |
12 |
No. of production runs |
2 |
5 |
1 |
4 |
Required: (1) Total cost, cost per unit under Conventional Costing System based machine hours
(2) Cost driver rate; (3) Total cost, cost per unit under Activity Based Costing.
[Answers:
|
|
A |
B |
C |
D |
1 |
Total cost |
4,625 |
46,250 |
19,800 |
234,500 |
CPU |
9.25 |
9.25 |
33.00 |
33.50 |
|
2 |
CDR |
$3; $250; $192; $380; $710 |
|||
3 |
Total cost |
6,997 |
53,368 |
21,142 |
223,668 |
CPU |
13.99 |
10.67 |
35.24 |
31.95 |
SOLUTION:
Given and working note:
Machine hour = Output × MHPU |
Machine hours rate |
||
A |
= 500 × 0.25 |
= 125 |
= Total overhead ÷ Total MH |
B |
= 5,000 × 0.25 |
= 1,250 |
= $62,375 ÷ 12,475 hours |
C |
= 600 × 1.00 |
= 600 |
= $5 |
D |
= 7,000 × 1.50 |
= 10,500 |
|
|
|
12,475 |
|
Cost Statement under Conventional Costing System
Particulars |
Products |
|||
|
A = 500 |
B = 5,000 |
C = 600 |
D = 7,000 |
Direct materials [Output × MCPU] |
2,500 |
25,000 |
9,600 |
119,000 |
Direct labour [Output × DLHPU × $6] |
1,500 |
15,000 |
7,200 |
63,000 |
Prime cost |
4,000 |
40,000 |
16,800 |
182,000 |
Add: Overhead (based on machine hour): |
|
|
|
|
Machine expenses (MH × Machine hour rate) |
625 |
6,250 |
3,000 |
52,500 |
Total cost |
$4,625 |
$46,250 |
$19,800 |
$234,500 |
Output |
500 |
5,000 |
600 |
7,000 |
Cost per units = Total cost ÷ Output |
$9.25 |
$9.25 |
$33.00 |
$33.50 |
Calculation of Cost Driver Rate
Activities |
Amount |
Cost Driver (CD) |
Total CD |
CD Rate |
1 |
2 |
3 |
4 |
5 = 2 ÷ 4 |
Machine oriented |
37,425 |
Machine hours |
12,475 |
3 |
Set up |
4,250 |
No. of set up |
17 |
250 |
Materials ordering |
1,920 |
No. of materials order |
10 |
192 |
Materials handling |
10,260 |
No. of materials handling |
27 |
380 |
Production runs |
8,520 |
No. of production |
12 |
710 |
Working note for total cost driver
No. of set up |
= A+B+C+D |
= 1+6+2+8 |
= 17 |
No. of materials order |
= A+B+C+D |
= 1+4+1+4 |
= 10 |
No. of materials handling |
= A+B+C+D |
= 2+10+3+12 |
= 27 |
No. of production |
= A+B+C+D |
= 2+5+1+4 |
= 12 |
Cost Statement under Activity Based Cost (ABC)
Particulars |
Products |
||||
|
A= 500 |
B =5,000 |
C =600 |
D= 7,000 |
|
Direct materials [Output × MCPU] |
2,500 |
25,000 |
9,600 |
119,000 |
|
Direct labour [Output × DLHPU × $6] |
1,500 |
15,000 |
7,200 |
63,000 |
|
Prime cost |
4,000 |
40,000 |
16,800 |
182,000 |
|
Add: Overhead (based on ABC): |
|
|
|
|
|
Machine oriented |
[Machine hours × $3] |
375 |
3,750 |
1,800 |
31,500 |
Set up |
[No. of set up × $250] |
250 |
1,500 |
500 |
2,000 |
Materials ordering |
[No. of order × $192] |
192 |
768 |
192 |
768 |
Materials handling |
[No. of materials handling × $380] |
760 |
3,800 |
1,140 |
4,560 |
Production runs |
[No. of production runs × $710] |
1,420 |
3,550 |
710 |
2,840 |
Total cost |
$6,997 |
$53,368 |
$21,142 |
$223,668 |
|
Output |
500 |
5,000 |
600 |
7,000 |
|
Cost per units = Total cost ÷ Output |
$13.99 |
$10.67 |
$35.24 |
$31.95 |
#####
Problems and Answers of Activity Based Costing |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
ABC Company (P) Ltd has following information:
Particulars $ Products ® |
P1 |
P2 |
|
The activity costs are: |
|
Output in units |
1,000 |
10,000 |
|
Volume related |
$110,000 |
Machine hour per unit |
2 |
2 |
|
Purchase related |
$120,000 |
DLH per unit |
4 |
4 |
|
Set up related |
$210,000 |
No. of purchase order |
80 |
160 |
|
Total |
$440,000 |
No. of set ups |
40 |
60 |
|
|
|
Required: (a) Cost driver rate; (b) Total overhead under ABC;
[Answer: (1) $5; $500 and $2,100;
(2) $134,000 and $306,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
Kohinoor Metal Uddhyog manufactures different kind of auto accessories. The following data are related to four specific products:
Particulars |
A |
B |
C |
D |
Output in units |
500 |
800 |
1,000 |
1,500 |
Prime cost |
$48,000 |
$80,000 |
$86,000 |
$120,000 |
Machine hour per unit |
4 |
6 |
4 |
6 |
No. of production runs |
5 |
7 |
8 |
10 |
No. of dispatch |
10 |
8 |
12 |
15 |
Further information:
Short term variable cost: |
Machine production |
$99,000 |
Machine hour |
Long term variable cost: |
Schedule cost |
$165,000 |
Production runs |
|
Set up cost |
$96,000 |
Production runs |
|
Dispatch of goods |
$137,700 |
No. of dispatch |
Required: (1) Cost driver rate; (2) Total overhead under activity based costing; (3) Cost per unit under ABC
[Answer: (1) $5; $5,500; $3,200 and $3,060;
(2) $132,100; $189,360; $212,320 and $297,900;
(3) $264.20; $236.73; $212.32 and $198.60]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
Birat Shoes Company has got order for three sizes shoes. Other information is:
Particulars $ |
Products ® |
M |
N |
O |
Output units |
|
420 |
280 |
560 |
Standard usage of raw materials |
|
2 |
4 |
3 |
Materials cost per unit |
(in $) |
$25 |
$15 |
$10 |
DLH per unit |
|
2.5 |
2.0 |
1.5 |
Machine hour per unit |
(hours) |
5 |
4 |
3 |
Selling price per unit |
(in $) |
$430 |
$400 |
$300 |
Production runs |
|
6 |
4 |
8 |
Order executed |
|
21 |
14 |
28 |
Requisition raised |
|
10 |
15 |
20 |
DLH $10 per labour hour
Cost driver and expenses:
|
Amount |
Cost driver |
Volume related cost |
36,750 |
Machine hour |
Set up cost |
101,430 |
No. of production runs |
Store receiving cost |
79,785 |
No. of requisition raised |
Quantity control cost |
36,000 |
No. of production runs |
Materials handling and dispatch |
97,650 |
No. of order executive |
|
$351,615 |
|
Required: (a) Total cost and cost per unit under conventional costing based on labour hour rate
(b) Cost driver rate; (c) Total cost and cost per unit under ABC
[Answer: (a) M = $182,196 and $433.80;
N = $102,771 and $367.04; O = $145,757 and $260.28;
(b) $7.5; $5,635; $1,773; $2,000 and $1,550;
(c) M = $143,340 and $341.29; N = $109,635 and $391.55;
O = $177,740 and $317.39]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
AP Manufacturing Company has a single production process. Three products P, Q and Rare produced by workers the wage rate per hour is $4. The budget information has been obtained for the year is as follows:
Product |
Production units |
Material |
Materials cost |
Labour hours |
Machine hours |
Batches |
|
|
Per unit |
Per unit |
Per unit |
Per unit |
|
P |
2,000 |
2 units |
$3 |
0.50 hour |
1.00 hour |
6 |
Q |
1,000 |
3 units |
$5 |
0.25 hour |
0.25 hour |
5 |
R |
500 |
4 units |
$2 |
1.00 hour |
1.50 hour |
4 |
The overhead cost and related cost drives are:
Overhead |
Cost Drives |
Amount (in $) |
Material receipt and inspections |
No of batches |
30,000 |
Material handing |
Quantity of materials |
18,000 |
Short term variable cost |
No of machine hours |
6,000 |
Required: Using activity based costing find out: (1) Cost driver rate; (2) Total cost for each product; (3) Cost per unit
Answers: (1) CDR = $2,000; $2; $2;
(2) Total cost = $34,000; $22,500; $16,500;
(3) $17; $22.50; $33]
Materials per unit is applied for Quantity not for direct materials
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
ABC Company manufactures two products namely X and Y. Data for the period is as follows:
|
Product X |
Product Y |
|
Output in units |
2,000 |
3,000 |
|
Machine hour unit |
2 hours |
1 hour |
|
Labour hour per unit |
2 hours |
3 hours |
|
Production run |
7 |
3 |
|
Total production overhead recorded and cost-driver fixed by cost accounting department is analyzed as:
Cost |
Cost Drives |
Amount ($) |
|
Set up cost |
Production runs |
20,000 |
|
Machine department |
Machine hours |
14,000 |
|
Scheduling cost |
Production runs |
18,000 |
|
Required: (a) Total overhead and overhead rate by using labour hour rate; (b) Cost driver rate
(c) Total overhead and overhead rate under activity based costing
Answer: (1) Total overhead: X = $16,000; Y = $36,000;
ORPU: X = $8.00, Y= $12.00;
(2) Total overhead: X = $34,600; Y = $17,400;
ORPU: X = $17.30, Y = $5.80;
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2F
A Company produces two types of products. The president of the company recently decided to change from a volume based costing system to an activity based cost system. To assess the effect of the change, the following data have been gathered:
Products |
Units |
Machine hours |
Production runs |
Prime cost |
Material component |
A B |
3,000 2,000 |
9,000 4,000 |
10 5 |
10,000 8,000 |
6,000 8,000 |
Total |
5,000 |
13,000 |
15 |
18,000 |
14,000 |
The overhead cost and cost drives are as follows:
Cost |
Cost drives |
Amount ($) |
Machine related activities |
Machine hours |
39,000 |
Set up cost |
Production runs |
30,000 |
Material handling costs |
No. of material components |
28,000 |
Required: (1) Cost drives rate for each item by using activity- based costing
(2) Total cost and cost per unit of each product by using cost- driver rate
[Answer: (1) Cost driver rate = $3, $2,000, $2;
(2) Total cost: A = $69,000; B = $46,000;
OPU: A = $23; B = $23;
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