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Chapter 6
Activity-Based Costing
Answers to End of Chapter Exercises

Q 6.1
a) Tradtional costing approach
Alpha Beta

Direct materials 56.00 75.00
Direct labour 4.00 8.00
60.00 83.00
23.53 47.06
Cost per unit 83.53 130.06

labour hours 0.8 1.6

Units 5,000 40,000
hours 4,000 64,000 68,000

Overheads 2,000,000
Overhead rate = 29.41

b) Activity Based costing approach

Alpha Beta Total

Purchase orders 28,000 56,000 84,000
Scrap/rework 72,000 144,000 216,000
Product testing 120,000 330,000 450,000
Machinery 500,000 750,000 1,250,000
Total 720,000 1,280,000 2,000,000

units 5,000 40,000

Overhead cost per unit 144 32
Alpha Beta

Direct materials 56 75
Direct labour 4 8
60 83
overhead cost per unit 144 32
Cost per unit 204 115

c) The cost of the two products is significantly different using a traditional approach to costing
compared to ABC. If cost is being used as a basis for pricing, then an uncompetitive rate may be
being set, resulting in lower sales.

2008 John Wiley & Sons Ltd.

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Q 6.2
Cost Cost of
per unit 120 units

Direct cost of production 1100.00 132,000
material handling 103.50 12,420
machinery 8.00 960
assembly 655.50 78,660
inspection 60.00 7,200
Manufacturing cost per unit 1927.00 231,240
R&D 140.00
marketing 200.00
Total cost per unit 2267.00

2008 John Wiley & Sons Ltd.

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Q 6.3
Tradtional costing approach
Snappit Badger

Direct materials 16.00 25.00
Direct labour 20.00 22.00
36.00 47.00
144.00 198.00
Cost per unit 180.00 245.00
mark-up 25% 45.00 61.25
225.00 306.25

labour hours 2 2.75

Calculation of overhead rate:
Hours 3500 1500 = 5,000 hours in total
Overheads 360,000
Overhead rate = 72.00 (360,000/5,000)

Activity Based costing approach

Snappit Badger Total

machine A 150000 150,000
Machine B 75000 75,000
Set up costs 6000 24000 30,000
Handling charges 25000 25000 50,000
Other overheads 33000 22000 55,000
Total 214000 146000 360,000

units 1,750 545

Overhead cost per unit 122.29 267.67
Snappit Badger 0

Direct materials 16.00 25.00
Direct labour 20.00 22.00
36.00 47.00
Overhead cost per unit 122.29 267.67
Cost per unit 158.29 314.67
mark-up 25% 39.57 78.67
197.86 393.34

2008 John Wiley & Sons Ltd.

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Q 6.4 a)
i) Traditional costing approach
A B C

Direct materials 25.00 62.50 105.00
Direct labour 4.00 8.00 8.00
29.00 70.50 113.00
105.00 210.00 210.00
Cost per unit 134.00 280.50 323.00
Mark-up 20% 26.80 56.10 64.60
160.80 336.60 387.60

Labour hours per unit 0.5 1 1

Number of units 20,000 1,000 10,000
Total hours per product 10,000 1,000 10,000 21,000

Overheads 4,410,000
Overhead rate = 4,410,000/21,000 = 210.00

ii) Activity Based costing approach

A B C Total

Machining 1,112,000 417,000 1,251,000 2,780,000
Material orders 277,300 35,400 277,300 590,000
Space 436,800 187,200 416,000 1,040,000
Total 1,826,100 639,600 1,944,300 4,410,000

units 20,000 1,000 10,000

Overhead cost per unit 91.31 639.60 194.43

A B C

Direct materials 25.00 62.50 105.00
Direct labour 4.00 8.00 8.00
29.00 70.50 113.00
Overhead per unit 91.31 639.60 194.43
Cost per unit 120.31 710.10 307.43
Mark-up 20% 24.06 142.02 61.49
144.37 852.12 368.92

b) The indication from the costing exercise is that product B has been substantially under-costed
when the traditional approach has been used, while for Products A and C there has been an
over-costing. This might have implications for the pricing of the three products. Note that there
are dangers in using cost information for decision making purposes. See for example discussion
in the chapter on the problems with identifying an accurate product or service cost for decision-
making purposes.

c) See also b) above

2008 John Wiley & Sons Ltd.

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