Activity Based Costing
Under Activity Based Costing Method :
Activity-based costing
Activity-based costing, also known as ABC, is an accounting method that
identifies a company's activities and assigns costs to units produced by the
company based on the number of activities used by each unit. Activity-based
costing first determines the purpose and cost of each activity performed by a
company and then assigns a proportionate cost to every individual unit produced
based on its consumption of those activities.
The Traditional Costing System
It is a well-known fact that the traditional costing systems utilize a single, volumebased cost driver. This is the reason why the traditional product costing system
distorts the cost of products. In most cases this type of costing system assigns the
overhead costs to products on the basis of their relative usage of direct labor. For
this reason traditional cost systems often report inaccurate product costs.
Under Traditional Costing Method :
Step 1 : Total Overhead = Rs.………………..
Step 2 : Calculation of Total Labour hours (DLH) or Total Machine hours (MH)
For Product A = Output units x DLH or MH per unit = xxxxxx
For Product B = Output units x DLH or MH per unit = xxxxxx
Total DLH or MH = xxxxxx
Step 3 : Overhead rate per DLH or per MH =
Total overhead (a)
Total DLH or Total MH (b)
Step 4 :
Calculation of Total cost :
Products
Particulars
Direct material
Direct wages
Other direct expenses
Prime Cost
Add : Overhead @ Rs…(Step 3)
Total Cost
Production unit
Cost per unit [Total cost /
Production unit]
A
B
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx (Step 3 x Step 2)
xxxx
xxxx
xxxx
xxxx
xxxx(Step 3 x Step 2)
xxxx
xxxx
xxxx
Step 1 : Calculation of Cost Driver Rate
Overheads
Cost driver
Total Cost Driver
Volume (CDV)
A
B
Total
Overhead 1
…………..
Rs….
Overhead 2
…………..
Rs….
Step 2 :
Cost Driver Rate
(Total Amt /
Total CDV)
Rs…….
Rs…….
Calculation of Total cost :
Products
Particulars
A
B
Direct material
Direct wages
Other direct expenses
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Prime Cost
Add : Overhead :
Overhead 1 @ Rs…..(CDR)
Overhead 2 @ Rs…..(CDR)
xxxx
xxxx
xxxx (CDR x CDV)
xxxx
xxxx (CDR x CDV)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Total Cost
Production unit
Cost per unit [Total cost /
Production unit]
Notes For Cost Driver Volume:
[1] If direct labour hour is given in per unit,
DLH = Production units x DLH per unit
Products
Production units
Labour hour per unit
A
2,000 units
2
B
3,000 units
1
DLH for Product A = 2,000 units x 2 DLH = 4,000 DLH
Product B = 3,000 units x 1 DLH = 3,000 DLH
[2] If Machine hour is given in per unit,
MH = Production units x MH per unit
Products
Production units
Machine hour per unit
A
2,000 units
1.5
B
3,000 units
2
MH for Product A = 2,000 units x 1.5 MH = 3,000 MH
Product B = 3,000 units x 2 M H = 6,000 MH
[3] For Quantity of material or Material consumed :
Quantity of material = Production unit x Raw material per unit (kg.)
Products
Production units
Raw material per unit (kg.)
A
2,000 units
4 kg.
B
3,000 units
3 kg.
Quantity of material for Product A = 2,000 units x 4 kg. = 8,000 kg.
Product B = 3,000 units x 3 kg . = 9,000 kg.
[4]
Products
Production units
A
2,000 units
B
3,000 units
* All products are usually produced in production run of 500 units.
No. of Production run for Product A = 2,000 units / 500 units = 4 times
for Product B = 3,000 units / 500 units = 6 times
[5]
Products
Production units
Raw material per unit (kg.)
A
2,000 units
4 kg.
B
3,000 units
3 kg.
* Orders are being made on a batch of 1,000 kg.
No. of Order for Product A = 2,000 units x 4 kg. = 8 times
1,000 kg.
for Product B = 3,000 units x 3 kg. = 9 times
1,000 kg.
[6] No. of Supervision for each product are 20 times or 20 nos. or 20
No. of Supervision for Product A = 20 times
for Product B = 20 times
Notes for Material cost and Labour cost :
[1] If Raw material cost is given in per unit,
Products
Production units
Material cost per unit
A
2,000 units
Rs. 10
B
3,000 units
Rs. 15
Material cost for Product A = 2,000 units x Rs. 10 = Rs. 20,000
Product B = 3,000 units x Rs. 15 = Rs. 45,000
[2] If Raw material cost is given in per kg.
Products
Production units
Raw material
cost per kg. (Rs.)
A
2,000 units
Rs. 5
B
3,000 units
Rs. 4
Material cost for Product A = 2,000 units x 4 kg. x Rs. 5 =
Product B = 3,000 units x 3 kg. x Rs. 4 =
Raw material per
unit (kg.)
4 kg.
3 kg.
Rs. 40,000
Rs. 36,000
[3] If Labour cost or wages is given in per unit,
Products
Production units
Labour cost per unit
A
2,000 units
Rs. 6
B
3,000 units
Rs. 7
Labour cost for Product A = 2,000 units x Rs. 6 = Rs. 12,000
Product B = 3,000 units x Rs. 7 = Rs. 21,000
[4] If Labour cost or wages is given in per hour,
Products
Production units
Labour hour per unit
A
2,000 units
2
B
3,000 units
1
Wages rate per hour Rs.4
Labour cost for Product A = 2,000 units x 2 DLH x Rs. 4 = Rs. 16,000
Product B = 3,000 units x 1 DLH x Rs. 4 = Rs. 12,000