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Cost Accounting
Cost Accounting
of XYZ Ltd: Products A Sales and production (units) Raw materials usage (units) Direct materials cost () Direct labour hours Machine hours Direct labour cost () Number of production runs Number of deliveries Number of receipts Number of production orders 90,000 10 30 2.5 5 20 5 18 50 45 B 30,000 7 40 3 3 30 10 7 70 25 C 15,000 14 15 1.5 7.5 10 50 50 700 60 Total 135,000 1,320,000 4,125,000 337,500 652,500 2,850,000 65 75 820 130
Overhead costs Set up Machines Receiving Packing Engineering Total You are required to
a) Calculate the total costs for each product if all overhead costs are absorbed on a labour hour basis; b) Calculate the total costs for each product, using activity based costing; c) Calculate and list the unit product costs from your figures in (a) and (b) above to show the differences between them and to comment briefly on any conclusions which may be drawn which could have pricing and profit implications.
The overheads recovered are, of course: Direct labour hour rate x number of direct labour hours per product For product A, for example, the calculation is: 10 per dlh x 2.5 dlh = 25
B 76,829.3
C 768,292.7
We then divide these product apportionments by the number of units made for each product, to derive the cost per unit for receiving goods. The calculations here give the following results: Product A Receiving cost per unit 0.60976 B 2.5610 C 51.2195
Notice, when compared with Drury's method of using the overhead rate as a percentage of direct materials cost, the version presented here gives a radically different result. Had we applied Drury's method, the product receiving cost per unit would have been: Overhead absorption rate: 900,000 x 100 = 21.82% = 4,125,000 Applying this rate to each product's material costs gives: Product A 6.55 B 8.73 C 3.27
The method we have used applies the full spirit of ABC by identifying and using fully the ABC approach. The other overhead rate, the Machine Hour Rate, is 3.79. This is calculated by dividing the total other overheads by the number of machine hours applied, or worked. In this case: 3,375,000 900,000 652,000 machine hours When multiplied by the number of machine hours per product, this then gives us the cost per unit for other overheads. For example, in the case of product A, the calculation is: 3.79103 x 5 machine hours per unit = 18.9655 Once all the calculations have been completed, the product cost analysis per unit of each product is: Product A B C = 3.79103
Direct materials Direct labour Materials overheads Other overheads Total Product cost
ABC method
As we said above, to apply the ABC method, we need to identify cost drivers for two stages: 1 cost drivers tracing the costs of inputs into cost pools; and 2 cost drivers tracing the cost pools into product costs The workings that follow illustrate clearly how such cost drivers work through the ABC system in these two stages: an initial overhead rate or amount being further subdivided according the needs of the situation. workings: The calculations for each of the rates to be used are: The machine hour rate is the only rate that is what we might call a traditional rate. All of the other rates we are about to use involve a two stage process. We will see the elements of these two stages as we get to them. machine hour overhead rate 1,000,000 652,500 machine hours This rate is used as normal. For the set up costs, we first devise a rate to tell us the cost per set up: total set up overheads divided by the number of set ups: in this case, this is 75,000 65 production runs We will return to this rate shortly. All of the other rates are calculated similarly. Hence they will be presented now without further comment. Receiving rate 900,000 820 receipts = 1,097.56 = 1,153.85 = 1.5326
Packing rate
650,000 75 deliveries
= 8,666.67
Engineering rate
= 5,769.23
All of this information can now be put together into a cost per unit statement as follows. The final stage in the whole ABC procedure, as far as product cost determination is concerned is to find out the costs per unit. The cost per unit statement follows, and then we will work through the calculations. Unit costs A Direct materials Direct labour Machine overheads Set up costs Receiving costs Packing costs Engineering costs Total Costs 30.0000 20.000 7.6628 0.0641 0.6098 1.7333 2.8846 62.9546 B 40.0000 30.000 4.5977 0.3846 2.5610 2.0222 4.8077 84.3732 C 15.000 10.000 11.4943 3.8462 51.2195 28.8889 23.0769 143.5257
Machine overheads are found by multiplying the machine hour rate by the number of machine hours per product per unit: machine hour rate 1.5326 x machine hours gives 5 7.6628 3 4.5977 7.5 11.4943
The set up costs rate we have already is the rate per machine set up, the cost per unit is calculated by multiplying the rate per set up by the number of set up per product and then dividing the results by the total number of units per product: Set up cost per set up 1153.85 x No of set ups gives 5 0.0010 10 50
0.0059 0.0592
5 5,769.25
10 11,538.50
50 57,692.50
these values are then divided by the number of units per product to give us the cost per unit: 0.0641 0.3846 3.8462
The receiving, packing and engineering costs are all calculated in the same way as the set up costs. There is no need to repeat these calculations, but check that they are understood. Summarizing each of these methods now we can see the impact of the different methods on product costs, Assuming that the ABC method is really more effective than the traditional approach, product A shows a cost difference of 42.1085 per unit. Summary 1: Total costs per unit using each of the three methods Product A DLH Mult ABC 75.0000 69.5753 62.9546 B 100.0000 83.9403 84.3732 C 40.0000 104.6678 143.5257
Summary 2: Overheads per unit using each of the three methods Product A DLH Mult ABC 25.0000 19.5753 12.9546 B 30.0000 13.9403 14.3732 C 15.0000 79.6678 118.5257
Summary 3: Overheads as a percentage of total costs Product A DLH Mult ABC 33.33% 28.14% 20.58% B 30.00% 16.61% 17.04% C 37.50% 76.11% 82.58%