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Activity Based Costing

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Augustin Bangalore
Augustin Bangalore

The document discusses activity-based costing (ABC), a method that assigns costs to products and services based on the activities consumed by each. It provides a 4-step process for ABC implementation: 1) identify activities, 2) assign resource costs to activities, 3) identify outputs, and 4) assign activity costs to outputs using cost drivers. ABC aims to more accurately determine costs by tracing them to specific causes like production activities rather than allocating overhead broadly.

Economy & FinanceBusiness
1 of 37
Activity based costing By Prof. Augustin Amaladas
Meaning ,[object Object],[object Object]
[object Object]
Historical development ,[object Object],[object Object]
[object Object]
[object Object]
[object Object]
[object Object],[object Object],[object Object]
History ,[object Object]
[object Object]
Methodology ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object]
[object Object],[object Object]
The Four Steps to ABC Implementation ,[object Object]
[object Object],[object Object],[object Object],[object Object]
[object Object]
[object Object]
[object Object]
Exercise 16(Activity Based costing) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],3 3 12 9 0.50 0.50 1.00 1-1/5 1/2 1/2 2 1-1/5 5 5 16 17 500 5,000 600 7000 P Q R S Direct labour cost/unit Machine hours/unit Direct labour/unit Material cost/unit Qty.of production Product
[object Object],Required:1) Select a suitable cost driver for each item of overhead expenses and calculate the cost per unit of cost driver 2.Using the concept of activity based costing , compute the factory cost per unit Of each product. These overhead costs are observed by products on a machine hour rate of Rs.4.80 per hour having an overhead cost per product of: A=Rs.1.20, B=Rs.1.20, C=4.8 D=Rs.7.2 2 5 1 4 2 10 3 12 1 4 1 4 1 6 2 8 P Q R S No.of spareparts No.of times materials handled No. of materials order No.of setup Product
Answer for 16 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Answer-16…. 3/2*3=4.5 8*256.18/7000=0.29 4*192/ 7000=0.11 12*280.74/7000=0.48 4*716.67/ 7000=0.41 1*.3=Rs.3 2*256.18/ 600=0.85 1*92/600= 0.32 3*280.74/ 600=1.40 1*716.67/ 600=1.19 ¼*3=0.75 6*256.18/ 5000=0.31 4*192/5000=0.15 10*280.7/ 5000=0.56 5*716.67/ 5000=0.72 ¼*Rs.3=.0.75 1*256.18/500=0.51 1*192/500= 0.38 2*280.74/ 500=1.12 2*716.67/500= 2.87 Machine overhead Setup cost Material Ordering cost Material handling cost Spare parts cost D C B A Overhead items
traditional system does not make correct assumptions that all overheads are Related to volume and machine time. Under traditional system products A and C are under costed because it misallocates costs for small volume products. Set ups Rs. 0.51 0.31 0.85 0.29 +4.43 +1.29 +1.96 -1.41 1.20 1.20 4.80 7.20 5.63 2.49 6.76 5.79 2.87 0.72 1.19 0.41 1.12 0.56 1.40 0.48 0.38 0.15 0.32 0.11 0.75 0.75 3.00 4.50 A B C D difference Total (old system) Total (ABC systems) Spare Parts Material handling Material ordering Machine overheads products
Answer- Activity costing… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Activity costing-Exercise-2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
Answer ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
5000 4000 600 14346 16094 1494 36534 7.31 15000 6000 5760 13243 24141 4482 53626 3.58 Units Direct materials cost Direct labour cost Receiving /sores cost(48*275.89) (52*275.89) Production runs/set up cost (36* 670.59) (24*670.59) Inspection cost (30* 149.41) (10* 149.41) Total cost of products Cost per unit Q P Particulars
Computation of sales value per quarter of component K(Activitity based costing) 3000 7500 12000 1800 5518 4024 3586 34428 8607 43035 14.34 Units Components of initial design(Rs.60000/8) Direct materials cost Direct labour cost (300 hours 8 Rs.6) Receiving /sores cost(20*275.89)) Production runs/set up cost (6* 670.59) Inspection cost (24* 149.41) Total cost of products Add: Mark up( 25% of cost) Sales value Selling price per unit of K(43035/3000 units) K Particulars
Life cycle costing ,[object Object]
Realization of a life cycle cost analysis ,[object Object]
"cradle-to-grave analysis", or "Womb-to-Tomb ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object]
[object Object]
[object Object],[object Object]

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Activity Based Costing

  • 1. Activity based costing By Prof. Augustin Amaladas
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  • 22. Answer-16…. 3/2*3=4.5 8*256.18/7000=0.29 4*192/ 7000=0.11 12*280.74/7000=0.48 4*716.67/ 7000=0.41 1*.3=Rs.3 2*256.18/ 600=0.85 1*92/600= 0.32 3*280.74/ 600=1.40 1*716.67/ 600=1.19 ¼*3=0.75 6*256.18/ 5000=0.31 4*192/5000=0.15 10*280.7/ 5000=0.56 5*716.67/ 5000=0.72 ¼*Rs.3=.0.75 1*256.18/500=0.51 1*192/500= 0.38 2*280.74/ 500=1.12 2*716.67/500= 2.87 Machine overhead Setup cost Material Ordering cost Material handling cost Spare parts cost D C B A Overhead items
  • 23. traditional system does not make correct assumptions that all overheads are Related to volume and machine time. Under traditional system products A and C are under costed because it misallocates costs for small volume products. Set ups Rs. 0.51 0.31 0.85 0.29 +4.43 +1.29 +1.96 -1.41 1.20 1.20 4.80 7.20 5.63 2.49 6.76 5.79 2.87 0.72 1.19 0.41 1.12 0.56 1.40 0.48 0.38 0.15 0.32 0.11 0.75 0.75 3.00 4.50 A B C D difference Total (old system) Total (ABC systems) Spare Parts Material handling Material ordering Machine overheads products
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  • 30. 5000 4000 600 14346 16094 1494 36534 7.31 15000 6000 5760 13243 24141 4482 53626 3.58 Units Direct materials cost Direct labour cost Receiving /sores cost(48*275.89) (52*275.89) Production runs/set up cost (36* 670.59) (24*670.59) Inspection cost (30* 149.41) (10* 149.41) Total cost of products Cost per unit Q P Particulars
  • 31. Computation of sales value per quarter of component K(Activitity based costing) 3000 7500 12000 1800 5518 4024 3586 34428 8607 43035 14.34 Units Components of initial design(Rs.60000/8) Direct materials cost Direct labour cost (300 hours 8 Rs.6) Receiving /sores cost(20*275.89)) Production runs/set up cost (6* 670.59) Inspection cost (24* 149.41) Total cost of products Add: Mark up( 25% of cost) Sales value Selling price per unit of K(43035/3000 units) K Particulars
  • 32.
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