activity based costing examples

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.


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


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


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.)


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:


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:


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.


8/23

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


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


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


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


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.


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.


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


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

.


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


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


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


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.


20/23


21/23


22/23


23/23

activity based costing examples

Documents