activity based costing examples
TRANSCRIPT
-
8/2/2019 Activity Based Costing Examples
1/23
Activity based costing examples
Example: 1
A company manufactures two products X and Y.The Product X is a low- volume and its sales are only 5000 units p.a.Produ
volume, its sales are are 25000 units p.a.Product X takes 6 labor hours to make one unit, but Product Y requires 8 hours
Details of costs for materials and labor for each product are: Rs
Particulars product x product y
Direct materials 200 100
Direct labor(@Rs.10 per hour) 60 80
260 180
The company works 100000 direct labour hours p.a. Total manufacturing overhead costs Rs.1750000p.a.
You are required to compute per unit cost of each product using:
(a)Direct labour hour rate method for absorption of overhead costs, and(b) ABC technique for absorption of overhead costs.
-
8/2/2019 Activity Based Costing Examples
2/23
Solution
(A)Computation of product costing using direct labour hour rate methodOverhead cost per our = Total manufacturing overhead /total direct labuor hour
=Rs. 1750000/100000 D.L.H Rs. 17.50
Manufacturing overhead
Product X =Rs. 17.50xD.L.H. =Rs. 105
Product Y =Rs 17.50x 8 D.L.H =Rs. 140
Activity based costing approach
Step1: ascertain the major activates or events and determine overhead rates for each activity
-
8/2/2019 Activity Based Costing Examples
3/23
Activity total overheads frequency rate per
(Traceable costs) of activity activity
Machine setup 450000 10000 45 per setup
Quality inspection 300000 15000 20 per Inspection
Production order 180000 600 300 per order
Machine hours worked 625000 50000 12.5 hour
Material receipts 195000 1500 130 per receipt
Total overheads 1750000
Step:2 Allocate overheads to products on the basis of activity rates
-
8/2/2019 Activity Based Costing Examples
4/23
Product x product y
Activity frequently rate per activity amount activity frequency amt.
activity activity frequency (Rs.)
Machine setup 10000 45 6000 270000 4000 180000Quality inspection 15000 20 10000 200000 5000 100000
Productive order 600 300 200 60000 400 120000
Machine hours worked 50000 12.5 12000 150000 38000 475000
Material receipts 1500 130 300 39000 1200 156000
Total overhead cost 719000 1031000
Total number of units produced 5000 25000
Overhead cost per unit 143.80 41.24
Computation of Total Cost under Both Methods
(RS.)
-
8/2/2019 Activity Based Costing Examples
5/23
Particulars ABC technique Traditional method
Product x product y Product x Product y
Direct material 20000 100.00 200 100
Direct labour 60.00 80.00 60 80
Manufacturing overhead 143.80 41.24 105 140
Total cost of manufacture 403.80 221.24 365 320
Example:2
ABC Ltd. Manufactures two types of machinery equipments Y and Z and applies/absorbs overheads on the basis of direct
hours. The budgeted overheadsand direct labour hours for the month of December,2009 are Rs. 1242500 and 20000 horespectively.The information about Companys products is as follows:
-
8/2/2019 Activity Based Costing Examples
6/23
Particulars Equipment Y Equipment Z
Budgeted production volume 2500 units 3125 units
Direct material cost Rs.300 p.u. Rs.450 p.u.
Direct labour cost:Y (3 hours @ Rs.150 p.h.) Rs.450 _
X (4 hours @ Rs.150 p.h.) _ Rs.600
ABC Ltds overheads of Rs. 1242500 can be identified with three major activities:
Order processing (Rs. 210000), machine processing (Rs. 875000),and product inspection (Rs.157500).These activities are
number of orders processed , machine hours worked, and inspection hours,respectively.The data relevant to these activ
follows:
-
8/2/2019 Activity Based Costing Examples
7/23
Orders processed machine hours worked inspection hours
Y 350 23000 4000
Z 250 27000 11000
Total 600 50000 15000
Required:
(i) Assuming use of directlabour hours to absorb/ apply overheads to production,compute the unit manufacturing coequipments Y and Z,if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity based costing, compute the unit manufacturing costs of the equipments y and , if the budmanufacturing volume is achieved.
(iii) ABC Ltd.s selling prices are based heavily on cost.By using direct labour hours as an application base,calculate thecost distortion(under-costed or over-costed)for each equipment.
(iv) Discuss, how an Activity Based costing might benefit ABC ltd.
-
8/2/2019 Activity Based Costing Examples
8/23
Solution:
(i) Computation of unit manufacturing cost using Direct Labour hours to absorb overheads to productionDirect labour hour rate =Rs.1242500/20000 D.L.H.=Rs.62.125 per D.L.H.
(Rs.)
Particulars Y Z
Direct material p.u. 300.00 450.00
Direct labour cost p.u. 450.00 600.00
Prime cost p.u. 750.00 1050.0
Add:overheads (3hrs.xRs. 62.125);(4 hrs. x Rs. 62.125) 186.38 248.50
Total cost p.u. 936.38 1298.50
(ii) Computation of unit manufacturing cost using Activity Based CostingSegregation of budgeted overheads
-
8/2/2019 Activity Based Costing Examples
9/23
(a)Order processing
Y = (Rs.210000x350/600)/2500 units =Rs. 49 p.u.
Z =(Rs.210000x250/600)/3125 units =Rs. 28p.u.
(b)Machine processing
Y = (Rs. 875000x23000/50000)/2500units =Rs.161p.u.
Z =((Rs. 875000x27000/50000)3125units =Rs.151.20p.u.
(c)Product inspection
Y = (Rs.157500x4000/15000)/2500 units = Rs. 16.80 p.u.
Z= (Rs.157500x11000/15000)/3125units =Rs. 36.96 p.u.
(Rs.)
Particulars Y Z
Direct material p.u. 300.00 450.00
Direct labour cost p.u 450.00 600.00
Prime cost p.u. 750.00 1050.00
-
8/2/2019 Activity Based Costing Examples
10/23
Add:budgeted overheads p.u.
Order processing 49.00 28.00
Machine processing 161.00 151.20
Product inspection 16.80 226.80 36.96 216.16
Total cost p.u. 976.80 1266.16
(iii) Statement showing difference in cost p.u.Particulars y z
Total cost p.u.
(a)Under Activity based costing method 976.80 1266.16(b)Under direct labour hour rate method 936.38 1298.50
Over stated /(under stated) (40.42) 32.34
(iv)The absorption of overheads under activity based costing helps in ascertainment of product cost nearest to the cos
since the activities that apportionment of overheads relates the activities that bring out the production.There will be
distortion if ABC method is used instead of blanket absorption rate i.e.direct labour hour rate of overhead absorption
-
8/2/2019 Activity Based Costing Examples
11/23
Example 3:
XYZ ltd. Produces and sells sophisticated glass itens a and b . in connection with both the products the following inform
revealed from the cost records for the month February , 2009:
Product A B
Output (in units) 60000 15000
Sales(Rs.)
Cost structure:
Direct material (Rs. Per unit) 18.75 45.00
Direct wages (Rs. Per unit ) 10.00 13.00
Direct labour hours 30000 hours 9750 hours
-
8/2/2019 Activity Based Costing Examples
12/23
No. of quantity produced per batch 240 50
Steup time per batch 2 hours 5 hours
The indirect costs for the month are as under. (Rs)
Cleaning and maintenance wages 270000
Designing costs 450000
Set up costs 300000
Manufacturing operations costs 637500
Shipment costs 81000
Distribution costs 391500
Factory administration costs 255000
At present the company adopts the policy to absorb indirect costs applying direct labour hour basis ands enjoying a good
the market with regard to product B,but facing a stiff price competition with regard to product A. the cost accountant of t
company, after making a rigours analysis of the data, decided to to shift from the absorption technique based on direct la
to activity cost driver basis and also to treat cleaning and maintenance wages as direct cost.
-
8/2/2019 Activity Based Costing Examples
13/23
The cost accountant identified Rs.120000 for product A and the balance of cleaning and maintenance wages fopr product
The data revelant to activites and products are as follows;
Activity cost driver product A product B
Designing square feet 30 sq. feet 70 sq. feet
Manufacturing operations moulding machine hours 9000 hours 3750 hours
Shipment number of shipment 100 100
Distribution cubic feet 45000 cu ft. 22500 cu ft.
Setup of moulding machie setup hours
Favtory administration direct labour hours
You are required
(i) To compute the total manufacturing costs and profits of the products by applying direct labour basis of absorptioassuming cleaning and maintenance costs as indirect,
(ii) To compute the total manufacturing cost andf profits of both the both products by applying activity based costincleaning and maintenance cost as indirect.
-
8/2/2019 Activity Based Costing Examples
14/23
(iii) To compare the results obtained from (i)and (ii) and give your opnion on th decision cost accountant .Solution
Total direct labor hours = 30000+9750=39750 hours
Calculation of total indirect costs (Rs.)
Cleaning and maintenance wages 2750000
Designing costs 450000
Setup costs 300000
Manufacturing operations costs 637500
Shipment cost 81000
Factory administration costs 255000
Total indirect costs 2385000
Overhead absoption rate = Rs 2385000/39750hrs.
(i) Computation of total manufacturing costy and profits of both the products by applying direct labour basis of abso
-
8/2/2019 Activity Based Costing Examples
15/23
Particulars product A product B Total
60000 units 15000 units
Per unit amount per unit amount
(Rs) (Rs) (Rs) (Rs)
Direct materials 18.75 1125000 45.00 675000 1800000
Direct labors 10.00 600000 13.00 195000 795000
Prime cost 28.75 17525000 58.00 8700000 2595000
Indirect costs
(30000 hrs x Rs 60) (9750 hrs x Rs. 60) 30.00 1800000 39.00 585000 2385000
Total cost 58.75 3525000 97.00 1455000 4980000
Profit(balancing figure) 4.25 255000 40.00 600000 855000
sales 63.00 3780000 137.00 2055000 5835000
.
-
8/2/2019 Activity Based Costing Examples
16/23
(ii)Computation of total manufacturing cost and the profits of both the products applying ABC
(a)Cleaning and maintenance wages (direct labour hour basis)
=Rs.270000/39750 DLH =Rs. 6.7925per DLH
Product A=30000 DLH*Rs. 607925 =Rs. 203775
Product B=9750 DLH *Rs. 607925 =Rs. 66225
(b)designing costs (square feet basis)r
=Rs.450000/100sq.feet =Rs. 4500 per sq. feet
Product A=30.feet *Rs. 4500 =Rs. 135000
Product B=70 sq feet *Rs. 4500 =Rs. 315000
(c)setup costs (setup hours basis)
=Rs. 300000/2000 hrs. =Rs. 150 per hr.
Product A=500hrs.*Rs. 150 =Rs. 75000
Product B=1500 hrs.*Rs. 150 =Rs. 2250000
-
8/2/2019 Activity Based Costing Examples
17/23
(d)Manufacturing Operations Costs(moulding machine hours basis)
= Rs. 637500/12750hrs. = Rs. 50 per MMH
Product A = 9000 hrs. x Rs.50 = Rs. 450000
Product B = 3750 hrs. x Rs.50 =Rs.187500
(e)Shipment Costs (No. of shipment basis)
=Rs.81000/200shipments =Rs. 405 per shipment
Product A = 100 shipment x Rs.405 = Rs. 40500
Product B = 100 shipment x Rs.405 = Rs. 40500
(f)Distribution Costs (area in cibic feet basis)
=Rs. 391500/67500 cubic feet =Rs. 5.80 per cubic feet
Product A = RS.45000 cubic feet x Rs.5.80 =Rs.261000
Product B = RS.22500 cubic feet x Rs.5.80 =Rs.130500
-
8/2/2019 Activity Based Costing Examples
18/23
(g) Factory Administration Costs(direct labour hours basis)
=Rs.255000/39750 DLH =Rs.6.4151 DLH
Product A = 30000 DLH X Rs.6.4151 =Rs.192453
Product B= 9750 DLH X Rs.6.4151 =Rs.62547
Computation of Product Cost and Profit by applying Activity Based Costing (Rs.)
Particulars Product A product B total
60000 units 15000 units
Per unit amount per unit amount
(Rs) (Rs) (Rs) (Rs)
Direct materials 18.75 1125000 45.00 675000 1800000
Direct labour 10.00 600000 13.00 195000 795000
Cleaning and maintenance
Expences 2.00 120000 10.00 150000 270000
prime cost (a) 30.75 1845000 68.00 1020000 2865000
-
8/2/2019 Activity Based Costing Examples
19/23
Indirect Costs:
Designing costs 2.25 135000 21.00 315000 450000
Setup Costs 1.25 75000 15.00 225000 300000
Manufacturing operation cost 7.50 450000 12.50 187500 637500
Shipment costs 0.68 40500 2.70 40500 81000
Distribution costs 4.35 261000 8.70 130500 391500
Factory administration costs 3.21 192453 4.17 62547 255000
Total indirect costs(b) 19.24 1153953 64.07 961047 2115000
Total costs(a) + (b) 49.99 2998953 132.07 1981047 4980000
Profit (balancing figure) 13.01 781047 4.93 73953 855000
Sales 63.00 3780000 137.00 2055000 5835000
Note:Cleaning and maintenance expenses have been taken on direct basis as per the Cost Accountants observation.
-
8/2/2019 Activity Based Costing Examples
20/23
-
8/2/2019 Activity Based Costing Examples
21/23
-
8/2/2019 Activity Based Costing Examples
22/23
-
8/2/2019 Activity Based Costing Examples
23/23