Activity Based Costing

Under Activity Based Costing Method :

Activity-based costing
Activity-based costing, also known as ABC, is an accounting method that Step 1 : Calculation of Cost Driver Rate
identifies a company's activities and assigns costs to units produced by the Overheads Cost driver Total Cost Driver Cost Driver Rate
company based on the number of activities used by each unit. Activity-based Volume (CDV) (Total / CDV)
costing first determines the purpose and cost of each activity performed by a Overhead 1 ………….. Rs…. …..+…..= Rs…….
company and then assigns a proportionate cost to every individual unit produced Overhead 2 ………….. Rs…. …..+…..= Rs…….
based on its consumption of those activities.

The Traditional Costing System Step 2 : Calculation of Total cost / Cost per unit
It is a well-known fact that the traditional costing systems utilize a single, volume- Products
based cost driver. This is the reason why the traditional product costing system Particulars A (………units) B (……..units)
distorts the cost of products. In most cases this type of costing system assigns the
overhead costs to products on the basis of their relative usage of direct labor. For Direct material xxxx xxxx
this reason traditional cost systems often report inaccurate product costs. Direct wages xxxx xxxx
Other direct expenses xxxx xxxx
Under Traditional Costing Method :
Step 1 : Total Overhead = Rs.……………….. Prime Cost xxxx xxxx
Step 2 : Calculation of Total Labour hours (DLH) or Total Machine hours (MH) Add : Overhead :
For Product A = Output units x DLH or MH per unit = xxxxxx Overhead 1 @ Rs…..(CDR) xxxx (CDR x CDV) xxxx (CDR x CDV)
For Product B = Output units x DLH or MH per unit = xxxxxx Overhead 2 @ Rs…..(CDR) xxxx xxxx
Total DLH or MH = xxxxxx
Total Cost xxxx xxxx
Step 3 : Overhead rate per DLH or per MH = Total overhead (a) Cost per unit [Total cost / xxxx xxxx
Production unit]
Total DLH or Total MH (b)

Step 4 : Calculation of Total cost / Cost per unit

Products
Particulars A (………units) B (……..units)

Direct material xxxx xxxx

Direct wages xxxx xxxx
Other direct expenses xxxx xxxx

Prime Cost xxxx xxxx

Add : Overhead @ Rs…(Step 3) xxxx (Step 3 x Step 2) xxxx(Step 3 x Step 2)

Total Cost xxxx xxxx

Cost per unit [Total cost / xxxx xxxx
Production unit]
Notes For Cost Driver Volume: [6] No. of Supervision for each product are 20 times or 20 nos. or 20
[1] If direct labour hour is given in per unit, No. of Supervision for Product A = 20 times
DLH = Production units x DLH per unit for Product B = 20 times
Products Production units Labour hour per unit
A 2,000 units 2
B 3,000 units 1 Notes for Material cost and Labour cost :
DLH for Product A = 2,000 units x 2 DLH = 4,000 DLH
Product B = 3,000 units x 1 DLH = 3,000 DLH [1] If Raw material cost is given in per unit,
Products Production units Material cost per unit
[2] If Machine hour is given in per unit, A 2,000 units Rs. 10
MH = Production units x MH per unit B 3,000 units Rs. 15
Products Production units Machine hour per unit Material cost for Product A = 2,000 units x Rs. 10 = Rs. 20,000
A 2,000 units 1.5 Product B = 3,000 units x Rs. 15 = Rs. 45,000
B 3,000 units 2
MH for Product A = 2,000 units x 1.5 MH = 3,000 MH [2] If Raw material cost is given in per kg.
Product B = 3,000 units x 2 M H = 6,000 MH Products Production units Raw material Raw material per
cost per kg. (Rs.) unit (kg.)
[3] For Quantity of material or Material consumed : A 2,000 units Rs. 5 4 kg.
Quantity of material = Production unit x Raw material per unit (kg.) B 3,000 units Rs. 4 3 kg.
Products Production units Raw material per unit (kg.) Material cost for Product A = 2,000 units x Rs. 5 x 4 kg. = Rs. 40,000
A 2,000 units 4 kg. Product B = 3,000 units x Rs. 4 x 3 kg. = Rs. 36,000
B 3,000 units 3 kg.
Quantity of material for Product A = 2,000 units x 4 kg. = 8,000 kg. [3] If Labour cost or wages is given in per unit,
Product B = 3,000 units x 3 kg . = 9,000 kg. Products Production units Labour cost per unit
A 2,000 units Rs. 6
[4] B 3,000 units Rs. 7
Products Production units Labour cost for Product A = 2,000 units x Rs. 6 = Rs. 12,000
A 2,000 units Product B = 3,000 units x Rs. 7 = Rs. 21,000
B 3,000 units
* All products are usually produced in production run of 500 units. [4] If Labour cost or wages is given in per hour,
No. of Production run for Product A = 2,000 units / 500 units = 4 times Products Production units Labour hour per unit
for Product B = 3,000 units / 500 units = 6 times A 2,000 units 2
B 3,000 units 1
[5] Wages rate per hour Rs.4
Products Production units Raw material per unit (kg.) Labour cost for Product A = 2,000 units x Rs. 4 x 2 DLH = Rs. 16,000
A 2,000 units 4 kg. Product B = 3,000 units x Rs. 4 x 1 DLH = Rs. 12,000
B 3,000 units 3 kg.
* Orders are being made on a batch of 1,000 kg.
No. of Order for Product A = 2,000 units x 4 kg. = 8 times
1,000 kg.
for Product B = 3,000 units x 3 kg. = 9 times
1,000 kg.