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ABC Costing

The document calculates unit costs for two products, Product S and Product W, using both a traditional overhead allocation method and an activity-based costing method. Using traditional overhead allocation, the unit cost of Product S is $32.50 and Product W is $53.00. However, using activity-based costing, which allocates overhead costs based on cost pools and expected activity levels, the unit cost of Product S is recalculated to be $29.83 while Product W's cost increases to $67.07.

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Ishan
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56 views4 pages

ABC Costing

The document calculates unit costs for two products, Product S and Product W, using both a traditional overhead allocation method and an activity-based costing method. Using traditional overhead allocation, the unit cost of Product S is $32.50 and Product W is $53.00. However, using activity-based costing, which allocates overhead costs based on cost pools and expected activity levels, the unit cost of Product S is recalculated to be $29.83 while Product W's cost increases to $67.07.

Uploaded by

Ishan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Predetermined Overhead rate = Estimated Overhead ÷ Estimated Direct labor hours

= 750,000 ÷ 50,000
= 15 per direct labor hour

Overhead applied to product = Direct labor hours require per unit × Predetermined Overhead rated

Overhead applied
Direct labor hours Predetermined Overhead applied
required per unit (a) Overhead rate (b) (a×b)
Product S 0.5 15 7.5
Product W 1 15 15

Calculation of Unit Cost


Product S Product W
Direct material 15 25
Direct labor 10 13
Overhead 7.5 15
Cost per unit 32.50 53

b)
Calculation of Cost per activity
Estimated Overhead Total Expected Cost per activity
Activity Cost pools Costs (a) Activity (b) (a/b)
Machine Setup 250,000 2,500 100.00
Purchases Orders 50,000 750 66.67
Machine hours 105,000 14,000 7.50
Maintenance requested 345,000 3,000 115.00
Total 750,000

Cost applied to each product

Product S
Cost per activity Expected Activity
(a) (b) Total Cost (a×b)
Machine Setup 100.00 900 90,000
Purchases Orders 66.67 550 36,667
Machine hours 7.50 3,500 26,250
Maintenance requested 115.00 1,400 161,000
Total Cost (d) 313,917
Total Unit produce (e ) 65,000
Cost per unit (d/e) 4.83
Calculation of Cost per unit
Product S Product W
Direct material 15.00 25.00
Direct labor 10.00 13.00
Overhead 4.83 29.07
Cost per unit 29.83 67.07

Analysis
Units cost of product S is high under current method of allocation which i.e. 32.50 as compared to unit cost in Activity based co
While the unit cost of product W is lower in current method i.e. 53.00 whereas in Acitivity based costing it is 67.07
verhead rated

r activity
(a/b)
Per Machine setup
Per Purchase Order
Per Machine hour
Per maintenance requested

Product W

Expected Activity (c) Total Cost (a×c)


1,600 160,000
200 13,333
10,500 78,750
1,600 184,000
436,083
15,000
29.07
ed to unit cost in Activity based costing approach i.e. 29.83.
sed costing it is 67.07

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