ACTIVITY BASED COSTING [ABC )

manufacturing Entity → main objective : to calculate total cost of production .

GOST

f ÷÷÷÷÷÷÷÷÷÷÷÷i
→ Direct Cost / Prime cost

Any cost
directly related to production

:c:# iris.
=
Prime cost

> Indirect cost 1 Overheads

Any cost not directly associated or related to production but it is part

of cost of production

How to add overheads / indirect cost to product

traditional costing Method / Advance 1 technical method

Absorption costing Based
Activity costing
( ABC )
✓
Absorption f absorbed A
Under traditional costing overheads are recovered on the basis of certain

activity such as labour hours in case of labour intensive firm or machine ,

hours in case of capital intensive firm and on the basis of such

OAK overheads are charged or applied to the product ( traditional costing

.

approach uses single recovery rate to apply overheads to the product .

E.
g :
.

Product A B
$ $
DM do as

DL 20 25

labour hours 3 hrs U Mrs

output level x 20000 units xd 0000 units

total labour hrs 60000 hrs d- ¥0 hrs = 900000 hrs

overheads -_ $500000 → recovered on the basis of labour hours

Required : calculate the cost per unit and total cost of each
of product A and product B
-

overhead absorption rate COARIORR ) = overheads

activity level

O A. R
. = Overheads = $500000 =
$51 hour
labour hours 100000 hrs

A B
$ $
DM do as

DL 20 25

Prime cost 30 GO

* Overheads 5×3 his] AS 20 5×4 hrs]

total cost 1 Unit 45 60

level 20000 units 00000 units

*
output x x

total cost $900000 $600000

ABC advanced and technical method of Overheads to
product
: at is the charging
-

It categorizes Ott into different cost pool and for each cost pool

driver is identified which rise to overheads

a cost gives .

An ABC overheads are first assigned to activities and then the cost
is assigned to the product based on the usage of activities
 In ABC which is a more complex approach and more difficult and
to
implement it requires trained individuals the
following
costly as ,

steps are followed : .

to
Identify the activities that consume resources to form a group
Sesto?
'
called
or bucket of cost E. g : machine set up cost quality
→ .

inspection .

' '

2. for each cost pool Identify Coster that causes the

cost to incur . Esg : .

No of set
.

ups , inspection hours

÷
3. Calculate activity rate → cost pool cost driver

4 . Use the activity rate to assign cost to the product .

Examptecontinued :
.

ActivityBasedg
The overheads of $500,000 is distributed between 3 cost pools
costpaol $
-

machine setup It 300.000

-

inspection 50.000

-
ordering processing 150.0-00
500.000
-

Additional Information : .

Padget A- B- Total

no .
of setups 1000 500 1500

700 hrs a 000

inspection hours 300 hrs

NO . of orders SO 100 150

Required
of A and
calculate cost
per unit and total cost product B

using activity based costing .

Activity Rate =
Costpool
cost driver

machine set $300000 $2001 setup

up cost
= =
.

$500 setups

inspection
$500000000 $501 hour
-

-
=

hrs

order
processing cost -
-

$1500002 =
$100011 order
150 orders
 Distributionofoverheads-A.BE
$ $

machine setup ( $2009000 setups ] 200000 000000 200×500 setups]

inspection [ 5150×700 35000 4500 ($50 x300hr]

Order
processing cost Glo So I 100-00 1000-00

Total overheads 285.000 215000 500000

- # -_

Totalcostlunitho B-
D. M do as

D. L IE E
Prime cost 30 HO

+ overheads 85000/20000] ¥25 -21.5 [215000/10000]

cost 1 unit as
per ABC 44.25 6ns

X output level 1120000 xa0O0O_

-

- total cost 8850-00 6r5000_