5.

Activity based costing(ABC) The basic premises of ABC: Activities consume resources and products consume activities Activities cause cost, not product

Organization is divided in small activities used to determine overheads. An activity is anevent, task or unit of work with a specified purpose, such as: designing products, setting up machines, operation machines, etc. ABC systems calculate the costs of individual activities and assign costs to cost objects by using cost drivers. Examples of cost drivers: Number of purchase orders Number of prod. set-ups Number of dispatches

Cost calculation
Product cost = Direct cost + A share of overheads related to the number of cost drivers units Overheads allocated to a product cost = Activity cost * number of cost driver units driver rates Activity cost driver rate=Activity cost/Total number of cost driver units

The Steps for developing an ABC system: Step 1: Analyse and define activities Step 2:Assign costs to activities Step 3: Determine the cost driver for each activity Step 4: Identify activities centre Step 5: Assign costs to products

Example: Details regarding products are as follows:

Product
Output in units Costs per units(MU): Direct Materials Direct Labour Machine hours(per unit)

A
120 40 28 4

B
100 50 21 3

C
80 30 14 2

D
120 60 21 3

The four products are similar andare usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed by using a machine hour rate and the total of the production overhead for the period has been analysed as follows:

MU
Machine department cost(rent, business rates, depreciation and supervision) Set-up costs Stores receiving Inspection/quality control Materials handling and despatch 10430 5250 3600 2100 4620 26000

Cost drivers: Cost Set-up costs Stores receiving Inspection Material handling Cost driver Number of production runs Requisitions raised Number of production runs Orders executed

The number of requisitions raised on the stores was 20 for each product and the number of orders executed was 42 each order being for a batch of 10 of a product. Requirements: 1. To calculate the total costs for each productif all overhead costs are absorbed on a machine hour basis

2. To calculate the total costs for each product, using ABC 3. To calculate the unit product costs from your figures in items 1 and 2. Solution:

1. OAR= 26000/(120*4+100*3+80*2+120*3)= 20MU/machine hour

A
1.Prime cost 2.Overhead absorbed 3.Total cost per unit(1+2) 4.Total cost (3*number of units produced) 2. ABC 40+28(DM+DL) 20*4=80(OAV*No of hours) 148 17760

B
71 60 131 13100

C
44 40 84 670

D
81 60 141 16920

Activity

Total Cost

Driver

Number of drivers
13000 21(42/2) 80 21 42

Cost driver rate total cost(Cost per unit of driver)

8023 250 45 100 110

1.Machine department 2.Set-up act. 3.SR 4.Inspection 5.M

10430 5250 3600 2100 4620

Machine hour Production runs NR RR OE

Elements
1.Prime cost 2.Activities consumed 2.1.Machine Department 2.2.SR 2.3. SU 2.3. I 2.4. MH 3.Total cost(1+2) 4.Total cost/unit(3/number of units)

A
8160(68*120) 3851(8023*120*4) 1500(250*120/20) 900 600(100*120/10) 1320(110*120/10) 16331 13609

B
7100 1250 1250 900 500 1100 13257 13257

C
3520 1000 1000 900 400 880 7987 9980

D
9720 1500 1500 900 600 1320 16928 14107

Total
28500 10430 5250 3600 2100 4620

3.

A
Total cost/u(1) TC/u(2) Diff(2-1) 148 136.09 (11,91)

B
131 142.57 1,57

C
84 99.80 15,80

D
14130 14107 0,07

EXAM!!!
3 subjects: 1. Composed by 2 questions(theory) Eg: present 921 account Compare Financial accounting and managerial accounting 2. Eg: for cost calculation,profit calculation entries in interlocking accounting Apply a method to a specific company. DIDNT UNDERSTAND! DONT ASK! 3. Just some examples..: 1. Calculate breakeven point or sales for target Cost volume->profit analysis
2. Process costing a cost if 2 products are produced(eg. Physical units)

- divided segmentation costs(high point, algebrical,etc)