Abc- Activity Based Costing

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1a) Activity based costing is a relatively new type of procedure that can be used as an inventory valuation method. The technique was developed to provide more accurate product costs. This improved accuracy is accomplished by tracing costs to products through activities. In other words, costs are traced to activities (activity costing) and then these costs are traced, in a second stage, to the products that use the activities. Another way to express the idea is to say that activities consume resources and products consume activities. Essentially, an attempt is made to treat all costs as variable, recognizing that all costs vary with something, whether it is production volume or some non-production volume related phenomenon. Both…show more content…
Example: the difference between product costs when using Traditional and ABC

Company A manufactures two products: Product H - a high volume product, and Product L - a low volume product.

Information regarding the production and costs of activities is as follows:

Product L Product H
Machine hours per unit 2 2
Labour hours per unit 4 4
Annual output (units) 1 000 10 000
Total machine hours 2 000 20 000
Total labour hours 4 000 40 000
No. of purchase orders 80 160
No. of machine set-ups 40 60

The cost of the activities was as follows: R

Volume related costs 110 000 Purchase related costs 120 000 Set-up related costs 210 000 440 000
(a) Traditional volume-based costing system

Total costs for allocation: 440 000

Overhead rate per machine hour:
440 000/22 000 = R20/hour
Overhead rate per labour hour:
440 000/44 000= R10/hour

Machine hour Labour hour
Cost per unit: L 2x20= 40 4x10= 40 H 2x20= 40 4x10= 40

Total cost allocated to: L 1 000x40=
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