1. Introduction
The traditional method of dealing with overheads is to split
them between variable overheads and
fixed overheads. If we are using absorption costing we then
decide on a suitable basis for absorption
Activity Based Costing (ABC) attempts to absorb overheads in a more accurate (and therefore more
useful) way.
2. The steps to be followed are as follows:
·
identify the major
activities that give rise to overheads (e.g. machining; dispatching of orders)
·
determine what causes the
cost of each activity – the cost
driver (e.g. machine hours; number
of dispatch
orders)
·
calculate the total cost
for each activity – the cost
pool (e.g. total machining
costs; total costs of
dispatch
department)
·
calculate an absorption
rate for each cost driver
·
calculate the total
overhead cost for each product manufactured
·
calculate the overhead cost per unit for each product
Una manufactures three products: A, B, and C.
Data for the period just ended is as follows:
A
B C
Production (units) 20,000 25,000 2,000
Sales price ( per unit) $20 $20 $20
Material cost (per unit) $5 $10 $10
Labour hours (per unit) 2
hours 1 hour 1 hour
(Labour is paid at the rate of $5 per hour)
Overheads for the period were as follows:
Set-up costs 90,000
Receiving 30,000
Dispatch 15,000
Machining 55,000
$190,000
Cost driver data:
A
B C
Machine hours per unit 2 2 2
Number of set-ups 10
13 2
Number of deliveries received 10
10 2
Number of orders dispatched 20
20 20
(a) Calculate the cost (and hence profit) per
unit, absorbing all the overheads on the basis of labour
hours.
(b) Calculate the cost (and hence profit) per
unit absorbing the overheads using an Activity Based
Costing approach.
Suggested Solution
Total overheads $190,000
Total labour hours
A 20,000 × 2
= 40,000
B 25,000 × 1
= 25,000
C 2,000 × 1 =
2,000
67,000 hours
O.A.R.
=190,000 = $2.836 per hour
67,000
Cost cards:
A
B C
Materials 5 10 10
Labour 10 5 5
Overheads (at $2.84 per hr) 5.68 2.84 2.84
20.68 17.84 17.84
Selling price 20 20 20
Profit / Loss $(0.68) $2.16
$2.16
(b) Total A B C
Set-up costs
(Cost per set up = ) 90,000
36,000 46,800 7,200
Receiving
(Cost per delivery = ) 30,000
13,636 13,636 2,728
Dispatch
(Cost per order = ) 15,000
5,000 5,000 5,000
Machining
(Cost per machine hour: ) 55,000 23,404 29,256 2,340
190,000
78,040 94,692 17,268
Number of units 20,000
25,000 2,000
Overheads p.u. $3.90 $3.79 $8.63
Costings:
A
B C
Materials 5 10
10
Labour 10 5 5
Overheads 3.90 3.79 8.63
18.90 18.79 23.63
Selling price 20 20 20
Profit
/ Loss $1.10 $1.21 $(3.63)
0 comments:
Post a Comment