Activity Base Costing is a costing where the cost is assigned. In this method, we classify which cost belongs to which particular activity. in this costing, the cost that is assigned is an indirect cost. some cost is difficult to assign such as office staff salary. Activity-based costing enhances the reliability of the cost data. by doing this activity base costing, we can easily figure out product pricing and costing, profitability analysis, and service pricing. there are two types of activity-based costing: the absorption method which is the traditional method, and the modern approach method, which is activity-based costing.
Example of Traditional Method in Activity Base Costing
If four friends goes to the restaurant and consumed the food and make the bill of $2000. so in the traditional method per friend's cost incurred is $500 which is $2000/4 friend.
Example of Modern Approach Method in Activity Base Costing
If four friends goes to a restaurant and consumed food with juice, and make a bill of $2000. but let's understand if in a $2000 bill, Juice is drunk. and the total cost of juice is $600,
but 3 people only juice drunk and food consumable person is 4.
Calculation of Cost Per person
$600 cost of Juice for 3 people, so per person cost is $200.
$1400 cost of food for 4 people, so per person cost is $350.
Per Person Cost
Per person cost for both consumed food with juice $350+$200= $550. so, both consumable person is 3.
1 person that is consumed only food the cost is $350.
Key Points
Activity-based costing is a way of assigning overhead costs and indirect costs such as utility bills and salaries.
ABC helps us for budgeting, product pricing decision, and product planning.
ABC is the most popular for the classification of cost.
ABC focuses on activities performed to manufacturers of products.
Activity Base Costing is an analysis of cost basis activities.
Activity Base Costing Calculation
Identify all the activities and costs involved the making the products.
Separate each activity from all activities into groups.
Find the total overhead cost for each cost pool.
Assign activity cost drivers to cost rate that is units rates, Hours, Parts Etc.
Divide the total overhead cost in each group, and get the cost drivers rate from activity cost drivers and divide the individual activity cost into cost pools such as manufacturing cost.
Multiply the cost driver rate with the activity cost driver.
Analysis of Questions
Question 1
Find Out Per Kilowatt Hours Cost
Answer: If $50000 cost is incurred for 10000-kilowatt hours, the per kilowatt hours is $50000/10000 K/H = $5.
Question 2
The company manufactures two products pencil and pen, and the consumption of costs are given below.
Find Out Each Product Cost
Analysis: The company makes two products like pencils and pens, the company gives 20000 K/h for two products, and the cost incurred for two products is $ 30000.
Answer: The Company Gives 15000 K/h for Pencils and the total K/h is 20000, so 15000 K/h / 20000 k/h * $30000 = $22500.
The Company Gives 5000 K/h for Pens and the total K/h is 20000, so 5000 K/h / 20000 k/h * $30000 = $7500.
Final Answer:
Question 3: The XYZ company makes 2 products A & B, and the total overhead of this company is $ 20000. the other information is given as follows. Prepare the Distribution of Overhead Costs.
Analysis: The company makes a total of number products 250 and the total cost incurred is $20000, for A is 100 orders and for B 150 orders.
Answer: Distribution of Overhead Costs.
Question 4: Zaman company manufactures three types of machinery X, Y, and Z, and absorption Over Head on the basis of direct labour hours. the budgeted overhead is $800000 and the total hours 10000 respectively.
Find out the Absorption Rate per labour hours which is Recovery Rate.
Answer:
Question 5: Jamun Company makes five products staplers, pen cups, note holders, paper clips, and scissors and the total cost overhead incurred for five products is $50000.
Cost for five products respectively.
Find out the cost of each product wise
Answer:
Question 6: Zulus Company makes two products of laptops & mobiles. the total cost overhead is $250000. the other information about zulus company products is as follows.
The activity of work hours performed by machine.
Find out each product each unit overhead cost.
Analysis: The company pays 8000 hours for 2000 units of laptops, and 7000 hours pay for 2500 units of mobiles. The company incurred a total overhead cost is $250000 for All the units of laptops and mobile which are 15000 units. so, we will figure out the cost price of each unit of each product to see how much we paid, such as how much we paid for 1 unit of laptop.
Answer: First we will find out each product's total cost which is a laptop's total cost. the company pays 8000 hours for the laptop so how much total cost for a laptop and the same as a find out for the mobile cost.
Laptop: The total machine hours are 15000 but the company pays 8000 hours for the laptops. so, laptop overhead cost is 8000 hours / 15000 hours * $250000 = $1,33,333.
Mobile: The total machine hours are 15000 but the company pays 7000 hours for the mobile. so, the mobile overhead cost is 7000 hours / 15000 hours * $250000 = $1,16,667.
Question 7: Kaman Company manufactures of 2 products books and papers, the company budgeted data are as follows.
Find out the total budgeted labour hours
Analysis: in the above example direct labour is not given in hours but it is given in minutes, hence minutes will convert into hours. if any minute is to be converted into hours, then the 60-minute is divided by the given minute.
Answer: 40 minutes will be charged for the one unit of books and 50 minutes will be charged for the one unit of papers. 40 minutes will be converted into hours therefore hours is a 40minute/60 minutes = 0.67 per hour of production of one unit of books. and 50 minutes will be converted into hours, therefore hours is a 50minute/60minute = 0.83 per hours of production of one unit of paper.
Question 8: Dal company makes 2 products P and Q, the total cost of 2 products as per budget $ 100000.
The Activity cost rates for 2 products.
Dal company has collected the following data for 2 products and 1 capacity.
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