BSAT (5th Semester) Hailey College of Commerce Management Accounting
Activity Based Costing
Q.1 Total budgeted fixed overhead for a firm is £712, 000. These have been traditionally
absorbed on a machine hour basis. The firm makes two products, A and B.
A B
Direct Material Cost £20 Rs. 60
Direct Labour Cost £50 Rs. 40
Machine Time 3 hours 4 hours
Annual Output 6,000 40,0000
The firm is considering changing to an Activity Based Costing system and has identified the
following information:
Product Machine Annual Total machine No of Set ups No. Of
hours /Unit Output hours Purchase orders
A 3 6,000 18,000 16 52
B 4 40,000 160,000 30 100
46,000 178,000 46 152
Cost Pools Amount £ Cost Driver
Machine Related 178,000 Machine Hours
Set-up Related 230,000 Set-ups
Purchasing Related 304,000 Purchase Orders
Total Overheads 712,000
Required:
a. Calculate the total cost and per unit cost for each product using traditional overhead
absorption.
b. Calculate the total cost and per unit cost for each product using the ABC (Activity Based
Costing) System.
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
Q.2 Hensau Ltd. has a single production process for which the following costs have been
estimated for the period ending 31st December 2011.
Particulars Amount £
Material Receipts and Inspection Cost 15,600
Power Cost 19,500
Material Handling Cost 13,650
Three products – X, Y and Z – are produced by workers who perform a number of operations on
material blanks using hand-held electrically powered drills. The workers have a wage rate of £4
per hour.
The following budgeted information has been obtained for the period ending 31st December 2011.
Particulars Product: X Product: Y Product: Z
Production Quantity (units) 2,000 1,500 800
Batches of Material 10 5 16
Data per product unit:
Direct Material (Square meters) 4 6 3
Direct Material (£ ) 5 3 6
Direct Labour (Minutes) 24 40 60
Number of Power drill operations 6 3 2
Overheads costs for material receipts and inspection, process power and material handling
are presently each absorbed by product units using rates per direct labour hour.
An activity-based costing investigation has revealed that the cost drivers for the overhead costs are
as follows:
Material receipt and inspection Number of batches of material
Process power: Number of power drill operations
Material handling: Quantity of Material (Square meters) handled
Required: Calculate total cost and per unit cost for each product under Traditional
Absorption Cost and Activity Based Costing.
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
Q.3: A company has two production departments (A and B) in its factory. Overheads in each
department are currently absorbed into product costs on the basis of Machine hour worked.
The production overhead absorption rate in department A is £5.60 per machine hour. In
department B the absorption rate is to be established from the following data relating to the
department for a period.
£
Allocated production overheads 24,260
Apportionment of factory level production overheads 37,539
Apportionment of service department production overheads 32,911
£94710
Machine hours worked 11550
The company is considering the introduction of a revised overhead apportionment system using
activity based costing. The overheads incurred in the factory in the period have been identified and
measured, as follows:
Activity Overhead £ cost driver Cost driver volume
( Dept A and B )
Machine setup 22,224 Batches 100
Machine operation 69,225 Machine hours 25,650
Inspection and testing 42,816 Units produced 446000
Servicing 39375 Labour hours 18,750
£173,670
The following information is available for the period to product X, one of the products
manufactured in the factory
8 batches
2,540 machine hour (Department A, 1400; Department B 1,140)
58,068 units produced
2,303 labour hours
Required:
a) Using the existing absorption method:
i. Establish the product overhead absorption rate in department
ii. Calculate the production overhead cost per unit of product X.
b) Using an activity based approach:
i. Establish a production overhead absorption rate for each activity;
ii. Calculate the production overhead cost per unit of product X
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
Q.4 Birtles pic is a manufacturer of small domestic electrical appliances. It market is very
competitive in terms of both price and new product innovation. As a result product life cycles are
short.
Birtles pic’s managers are concerned about the reliability of its product costing system. It currently
uses an absorption costing system and absorbs overhead on the basis of budgeted direct labour
hours. On this basis the estimated cost of its latest product, a talking electric kettle, is as follows:
£ per unit
Direct material 4.50
Direct labour ( £12 per hour ) 0.50
Production overheads (£ 120 per hour) 5.00
Production cost 10.00
The firm’s management accountant has suggested that more accurate product costs would be
obtained if an activity based costing (ABC) approach were used. He has collected the following
information as a starting point for an ABC treatment of production overhead costs.
Budgeted factory overhead per annum
Cost pool Cost per annum Cost driver
£000
Stores administration 5000 Number of different components
Production line set ups 3000 Number of set ups
Dispatch 1000 Number of dispatches
Other overheads 3000 Direct labour hour
Total production overhead 12000
Estimated activity per annum:
Cost driver Total Activity per annum
Number of components 2000 items
Number of setups 10,000 setups
Number of dispatches 20,000 dispatches
Direct labour hours 100,000 hours
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
Each talking kettle uses 10 different components and kettle manufacturer will involve six
production line set-ups per annum. Five hundred dispatches will be required per annum. Budgeted
production is 10,000 kettles per annum.
Required:
Estimate the cost of talking kettle using an ABC approach and the cost drivers suggested by the
management accountant.
Q.5
Required:
(a) Calculate the total cost and cost per unit for products A, B and C under traditional absorption
costing, using direct labour hours as the basis for apportionment.
(b) Calculate the total cost and cost per unit of each product using activity based costing.
Q.6 Brick by Brick (BBB) is a building business that provides a range of building services to
the public. Recently they have been asked to quote for garage conversions (GC) and extensions to
properties (EX) and have found that they are winning fewer GC contracts than expected. BBB has
a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
labour hour basis. BBB thinks that a switch to activity based costing (ABC) to absorb overheads
would reduce the cost associated to GC and hence make them more competitive.
A typical GC costs $3,500 in materials and takes 300 labour hours to complete. A GC requires
only one site visit by a supervisor and needs only one planning document to be raised. The typical
EX costs $8,000 in materials and takes 500 hours to complete. An EX requires six site visits and
five planning documents. In all cases labour is paid $15 per hour.
Required:
(a) Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the
overheads.
(b) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the
overheads.
Q.7 Triple Limited makes three types of gold watch – the Diva (D), the Classic (C) and the
Poser (P). A traditional product costing system is used at present; although an activity based
costing (ABC) system is being considered. Details of the three products for a typical period are:
Direct labour costs $6 per hour and production overheads are absorbed on a machine hour basis.
The overhead absorption rate for the period is $28 per machine hour.
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
Required:
(a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on
the basis of machine hours.
(b) Calculate the cost per unit for each product using ABC principles (work to two decimal places).
Q.8 Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is
relatively elastic whilst demand for product Z is relatively inelastic. Each product uses the same
materials and the same type of direct labour but in different quantities. For many years, the
company has been using full absorption costing and absorbing overheads on the basis of direct
labour hours. Selling prices are then determined using cost plus pricing. This is common within
this industry, with most competitors applying a standard mark-up.
Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000
units and 22,000 units respectively.
The budgeted direct costs of the three products are shown below:
Product X ($ Per Unit) Y ($ Per Unit) X ($ Per Unit)
Direct Materials 25 28 22
Direct labour ($ 12 per hour) 30 36 24
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BSAT (5th Semester) Hailey College of Commerce Management Accounting
In the next year, Duff Co also expects to incur indirect production costs of $1,377,400, which are
analyzed as follows:
Cost pools $ Cost drivers
Machine set up costs 280,000 Number of batches
Material ordering costs 316,000 Number of purchase orders
Machine running costs 420,000 Number of machine hours
General facility costs 361,000 Number of machines hours
Total 1,377,400
The following additional data relate to each product:
Product X Y Z
Batch size (units) 500 800 400
No of purchase orders per batch 4 5 4
Machine hours per unit 1.5 1.25 1.4
Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited
because of its use of cost plus pricing and the application of the standard mark-up. The finance
director has suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be charged.
Required:
(a) Calculate the budgeted full production cost per unit of each product using Duff Co’s current
method of absorption costing. All workings should be to two decimal places.
(b) Calculate the budgeted full production cost per unit of each product using activity based
costing. All workings should be to two decimal places.
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