Activity Based Costing 22

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Activity Based Costing Worked Example The following information provides details of the costs, volume and transaction cost drivers for a period in respect of XYZ Ltd: Products A B C Total Sales and production (units) 90,000 30,000 15,000 135,000 Raw materials usage (units) 10 7 14 1,320,000 Direct materials cost (£) 30 40 15 4,125,000 Direct labour hours 2.5 3 1.5 337,500 Machine hours 5 3 7.5 652,500 Direct labour cost (£) 20 30 10 2,850,000 Number of production runs 5 10 50 65 Number of deliveries 18 7 50 75 Number of receipts 50 70 700 820 Number of production orders 45 25 60 130 Overhead costs £ Set up 75,000 Machines 1,000,000…show more content…
The receiving overhead rate is Total receiving overheads Total number of receipts £900,000 820 £1,097.56 per receipt Using this rate as a constant allows us to evaluate the product overhead apportionments: overheads per receipt x receipts per product group For product A: £1,097.56 per receipt x 50 receipts £54,878 Product A B C Receiving overheads apportionment £54,787.0 £76,829.3 £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 B C Receiving cost per unit £0.60976 £2.5610 £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 B C £6.55 8.73 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

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