ACTIVITY BASED COSTING [ABC )
manufacturing Entity → main objective : to calculate total cost of production .
GOST
f ÷÷÷÷÷÷÷÷÷÷÷÷i
→ Direct Cost / Prime cost
Any cost
directly related to production
:c:# iris.
=
Prime cost
> Indirect cost 1 Overheads
Any cost not directly associated or related to production but it is part
of cost of production
How to add overheads / indirect cost to product
traditional costing Method / Advance 1 technical method
Absorption costing Based
Activity costing
( ABC )
✓
Absorption f absorbed A
Under traditional costing overheads are recovered on the basis of certain
activity such as labour hours in case of labour intensive firm or machine ,
hours in case of capital intensive firm and on the basis of such
OAK overheads are charged or applied to the product ( traditional costing
.
approach uses single recovery rate to apply overheads to the product .
E.
g :
.
Product A B
$ $
DM do as
DL 20 25
labour hours 3 hrs U Mrs
output level x 20000 units xd 0000 units
total labour hrs 60000 hrs d- ¥0 hrs = 900000 hrs
overheads -_ $500000 → recovered on the basis of labour hours
Required : calculate the cost per unit and total cost of each
of product A and product B
-
overhead absorption rate COARIORR ) = overheads
activity level
O A. R
. = Overheads = $500000 =
$51 hour
labour hours 100000 hrs
A B
$ $
DM do as
DL 20 25
Prime cost 30 GO
* Overheads 5×3 his] AS 20 5×4 hrs]
total cost 1 Unit 45 60
level 20000 units 00000 units
*
output x x
total cost $900000 $600000
ABC advanced and technical method of Overheads to
product
: at is the charging
-
It categorizes Ott into different cost pool and for each cost pool
driver is identified which rise to overheads
a cost gives .
An ABC overheads are first assigned to activities and then the cost
is assigned to the product based on the usage of activities
In ABC which is a more complex approach and more difficult and
to
implement it requires trained individuals the
following
costly as ,
steps are followed : .
to
Identify the activities that consume resources to form a group
Sesto?
'
called
or bucket of cost E. g : machine set up cost quality
→ .
inspection .
' '
2. for each cost pool Identify Coster that causes the
cost to incur . Esg : .
No of set
.
ups , inspection hours
÷
3. Calculate activity rate → cost pool cost driver
4 . Use the activity rate to assign cost to the product .
Examptecontinued :
.
ActivityBasedg
The overheads of $500,000 is distributed between 3 cost pools
costpaol $
-
machine setup It 300.000
-
inspection 50.000
-
ordering processing 150.0-00
500.000
-
Additional Information : .
Padget A- B- Total
no .
of setups 1000 500 1500
700 hrs a 000
inspection hours 300 hrs
NO . of orders SO 100 150
Required
of A and
calculate cost
per unit and total cost product B
using activity based costing .
Activity Rate =
Costpool
cost driver
machine set $300000 $2001 setup
up cost
= =
.
$500 setups
inspection
$500000000 $501 hour
-
-
=
hrs
order
processing cost -
-
$1500002 =
$100011 order
150 orders
[Link]
$ $
machine setup ( $2009000 setups ] 200000 000000 200×500 setups]
inspection [ 5150×700 35000 4500 ($50 x300hr]
Order
processing cost Glo So I 100-00 1000-00
Total overheads 285.000 215000 500000
- # -_
Totalcostlunitho B-
D. M do as
D. L IE E
Prime cost 30 HO
+ overheads 85000/20000] ¥25 -21.5 [215000/10000]
cost 1 unit as
per ABC 44.25 6ns
X output level 1120000 xa0O0O_
-
- total cost 8850-00 6r5000_
