Activity Based Costing

Group Members:Shahid Ashraf Abdul BasitM.Umer Tahir ZareefM. Nabeel

A.B.C

• What is A.B.C?• How A.B.C is developed?

(Steps Involved)• Comparison of unit costs(A.B.C and traditional department product costing)

Developing activity Based Costing

• Step I: Identify the activities• Step II: Identify the cost drivers• Step III: Compute the cost driver rates• Step IV: Assign Cost using activity based costing

Example

Product Costing data

Scented cards Reg. cards Total

Units prod. per year 20000 200000 ----

Prime cots 160000 1500000 1660000

Direct Labour hours 20000 160000 180000

Number of set ups 60 40 100

Machine hours 10000 80000 90000

Inspection hours 2000 16000 18000

number of moves 180 120 300

Departmental Data Cutting Printing TotalDirect labor hours:

Scented cards 10000 10000 20000Regular cards 150000 10000 160000

Total 160000 20000 180000Machine hours:

Scented cards 2000 8000 10000Regular cards 8000 72000 80000

Total 10000 80000 90000Over head costs:

setting up equip 120000 120000 240000Moving materials 60000 60000 120000

Maching 20000 180000 200000Inspecting produts 16000 144000 160000

Total 216000 504000 720000

Step I: Identify the activities

• Setting up equipment• Machining• Moving materials• Inspecting products

Step II: Identify the cost drivers

Activities Cost drivers

Setting up equipment No. of set ups

Machining Machine hours

Moving materials No. Of moves

Inspecting products Inspection hours

Step III: Compute the cost driver rates

• Formula: estd. indirect cost / estd. volume of activity base

• Setting up equipment: 240000/100(setups) = 2400 per set up

• Machining: 200000/90000(machine hours) = 2.22 per mach. hr

• Inspecting: 160000/18000(inspection hours) = 8.89 per insp. Hr

• Moving materials: 120000/300(moves) = 400 per move

Step IV: Unit Cost Computation Activity Rates Scented Regular Prime Cost 160000 1500000 Over head costs: (a)Setting up: 2400*60 144000 2400*40 96000 (b)Machining: 2.22*10000 22200 2.22*80000 177600 (c)Inspecting: 8.89*2000 17780 8.89*16000 142240 (d)Moving Materials: 400*180 72000 400*120 48000

Total Manuf Cost $ 415,980.00 $ 1,963,840.00 Units of Prod 20000 200000 Unit cost 20.80 9.82

Unit Cost Computation Plant wide

Scented Regular

Prime Cost 160000 1500000

Over head costs :

(4*20000) 80000

(4*160000) 640000

Total Manuf Cost 240000 2140000

Units of Prod 20000 200000

Unit cost 12 10.7

Unit Cost Computation Departmental Rates

Scented Regular

Prime Cost 160000 1500000

Over head costs :

[(1.35*10000) + (6.30*8000)] 63900

[(1.35*150000) + (6.30*72000)] 656100

Total Manuf Cost 223900 2156100

Units of Prod 20000 200000

Unit cost 11.20 10.78

Comparison of unit Cost

Scented Regular

Activity Base Cost ……. 20.799 9.8192

Plant wide Rate ……….. 12 10.7

Dept. Rate ………………. 11.195 10.7805

Choice of A.B.C in modern production &

Limitations