ABC is method that lists and measures the cost of each activity that facilitates the production to present the merchandise and service to client.
the cost driver for materials ordering would be the number of orders placed, the cost driver for set-up costs would be the number of production runs etc.
After the cost drivers have been identified then each cost driver’s overheads are collected together. Each pool is then divided by its driver, for example all overheads in the cost pool for the materials ordering process would be divided by the number of orders placed to give a value for the cost of placing an order.
Marketing Costs | 72,000 | Material Processing Costs | 25,600 | After Sales & Repairs | 18,100 | Production Control Costs | 95,000 | Maintenance Costs | 28,000 | Power costs | 136,000 | The company produces 2 products called Ace and Whisk and other relevant data relating to the products are as follows: | Ace | Whisk | Production quantities (units) | 7,500 units | 12,500 units | Number of batches | 10 batches | 20 batches | Maintenance hours | 1,820 hours | 2,310 hours | Stores requisitions | 25 requisitions | 30 requisitions | Customer orders | 650 orders | 750 orders | Number of after sales requests | 130 | 200 | Material cost per kg (£) | £3.50 per kg | £3.50 per kg | Kgs per unit of product | 7 kgs per unit | 4 kgs per unit | Labour rate per hour (£) | £10.50 per hour | £11.00 per hour | Labour hours per unit of product | 3 hour per unit | 6 hour per unit | Machine hours per unit of product | 5 hours per unit | 7 hours per unit | Calculate the cost per unit for Ace and Whisk based.
a) On the absorption based costing system based on labour hours b) On the activity based costing system c) Prepare a report for your Manager accurately describing activity based costing, giving justification for cost drivers chosen and advising the Managing Director of the advantages of moving to such a method.
In add-on to its application in a broad assortment of commercial fabrication concern it has besides been adopted by public public-service corporations, by sweeping and retail administrations.
The acceptance rate in the Far East is non so mention worthy because of complexness in implementing the system ; it deals with tonss of proficient issues.
Nowadays with industry using more technology, overheads have become a bigger proportion of total costs and this has resulted in increasing amounts of overheads being allocated to reducing numbers of machine or labour hours, giving questionable allocation of costs.
Activity based costing is an alternative method to this and was developed in order to more accurately reflect the factors which cause overhead costs to arise.
Overhead costs are attributed to products on the basis that it is activities that cause costs to arise.
These activities might include, for example: * Materials ordering * Materials storage * Setting up production runs * Testing the quality of production * Production scheduling Each activity can be identified with a cost driver e.g.