CHAP 5 - Activity Based Costing
CHAP 5 - Activity Based Costing
CHAP 5 - Activity Based Costing
52 ACTIVITY
MATERIAL
BASED COSTING
1. MEANING
2. DEFINITIONS
TERM MEANING
Cost o An item for which Cost measurement is required is called Cost object.
Object o e.g. Product, Customer, Job, Assignment, etc.
Cost Driver o A Factor that causes a change in the cost of an activity is called cost
driver
o It can be classified into two types;
1. Resource Cost Driver
2. Activity Cost Driver
e.g.
7. Assign costs to cost object Based on the cost driver rate (i.e.
Resources Consumed × Activity Cost Driver Rate )
In this system, overheads are related to In this system, overheads are related to
cost center activities
Costs are assigned to Cost Units, ie. To Costs are assigned to Cost Objectives, ie
Products, or jobs customers,
Only two levels of activities are identified All four levels of activities are identified, Viz.
in this system: a) Unit Level Activities,
a) Unit Level Activities (Variable) b) Batch Level Activities,
and c) Product Level Activities and
b) Facility Level Activities (Fixed) d) Facility Level Activities.
Time is assumed as the only factor Activity wise Cost Drivers are identified.
governing cost in all cost centers. Time is one of Cost Driver.
Usage of Recovery rate may be either:- Specific Activity wise recovery rates are
CONCEPT 1
Classify the following items under appropriate type of activities in Activity Based Costing;
a) Maintenance of Buildings
b) Use of indirect materials
c) Material ordering
d) Indirect Consumables
e) Inspection of products – like first item of every batch
f) Producing parts to a certain specification
g) Advertising costs, if advertisement is for individual products
Answer:
Item Types of Activity
CONCEPT 2
Indicate any two activity Cost drivers in respect of each of the following activity cost pools:
1) Manufacturing Cost
2) Human resources Cost
3) Marketing and Sales Costs
4) Accounting Costs
ILLUSTRATION 1
1. A company produces three products A, B, and C, with standard costs and quantities per
unit are as follows :
Products A B C
Quantity produced 10,000 20,000 30,000
Direct material per unit (Rs.) 50 40 30
Direct labour per units (Rs.) 30 40 50
Labour hours required per unit 3 4 5
Machine hours required per unit 4 4 7
Number of purchase requisitions 1,200 1,800 2,000
Number of set ups 240 260 300
Total labour hours in department 1 = 1,83,333 while total machine hours in Department
2 = 5,00,000.
Number of batches received / inspected = 5,000; Number of batches for scheduling and
set-up = 8000.
Required:
a) Prepare product cost statement under traditional absorption costing and activating
based costing method.
b) Compare the results under two methods.
SOLUTION
Statement of cost :
Direct Costs:
- Direct Labour
- Direct Material
- Production Overhead:
Number of units
Total costs
A B C Total
ILLUSTRATION 2
MST limited has collected the following data its two activities. It calculates activity cost rates
based on cost driver capacity.
The company makes three products M, S and T. for the year ended March 31, 2014. The
following consumption of cost drivers was reported:
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
SOLUTION
1. Statement of cost allocation to each product from each activity
Product
Quality inspections
(Refer to working note)
Working note:
Quality inspection