Question No.1 Having the attention in ICMA course on activity based costing (ABC) you decide to experiment by applying the principle of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period; Product A B C D Output in units Cost per unit: 120 Rs. 100 Rs. 80 Rs. 120 Rs. Direct material Direct labor Machine hour per unit 40 28 4 50 21 3 30 14 2 60 21 3 The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. The production overheads are currently absorbed by using a machine hour rate the total of production overheads for the period are analyzed as follows: Machine department costs (rent, business rates, depreciation, and supervision) Setup costs Stores receiving Inspection / Quality control Material handling and dispatch Rs. 10,430 5,250 3,600 2,100 4,620 You have ascertained that the ‘Cost Drivers’ to be used are listed below for the overhead costs shown: Costs Cost Driver Set up costs Stores receiving Inspection / Quality control Material handling and dispatch Number of production runs Requisitions raised Number of production runs Orders executed The number of requisitions raised on the store was 20 for each period product and the number of orders executed was 42, each order being for a batch of a product. You are required: To calculate the total costs of each product if all overhead costs are absorbed on machine hour basis. To calculate the total costs for each product using activity based costing. To calculate and list the unit product costs from your figures in (a) and (b) above to show the difference and to comment briefly on any conclusions which may be drawn and which could have profit and pricing implications.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Question No.1
Having the attention in ICMA course on activity based costing (ABC) you decide to experiment by applying the principle of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period;
|
Product |
A |
B |
C |
D |
|
Output in units Cost per unit: |
120 Rs. |
100 Rs. |
80 Rs. |
120 Rs. |
|
Direct material Direct labor Machine hour per unit |
40 28 4 |
50 21 3 |
30 14 2 |
60 21 3 |
The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units.
The production overheads are currently absorbed by using a machine hour rate the total of production overheads for the period are analyzed as follows:
|
Machine department costs (rent, business rates, Setup costs Stores receiving Inspection / Quality control Material handling and dispatch |
Rs.
10,430 5,250 3,600 2,100 4,620 |
You have ascertained that the ‘Cost Drivers’ to be used are listed below for the overhead costs shown:
|
Costs |
Cost Driver |
|
Set up costs Stores receiving Inspection / Quality control Material handling and dispatch |
Number of production runs Requisitions raised Number of production runs Orders executed |
The number of requisitions raised on the store was 20 for each period product and the number of orders executed was 42, each order being for a batch of a product.
You are required:
- To calculate the total costs of each product if all overhead costs are absorbed on machine hour basis.
- To calculate the total costs for each product using activity based costing.
- To calculate and list the unit product costs from your figures in (a) and (b) above to show the difference and to comment briefly on any conclusions which may be drawn and which could have profit and pricing implications.
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