Essay Activity Based Costing

Total budgeted direct labour hours for the month are 8,750 Relevant Data for the two products are as follows: Product X Product Y Direct labour hours per unit 1 1.5 Direct Materials (per unit) 17.5 12.00 Direct Labour (per unit) 12.00 18.00 Using Activity Based Costing ABC involves the identification of key activities and their drivers.This firm has established 5 basic activities which take place: * Machining * Finishing * Materials ordering * Materials issue to production * Scheduling, control and quality testing of production You are provided with the following information about each cost driver: Activity | Cost Driver | Total | Product X | Product Y | £ | Machining | Machine hours | 3000 | 2000 | 1000 | 45000 | Finishing | Direct labour hours | 5000 | 2000 | 3000 | 25000 | Material ordering | No of orders placed | 25 | 16 | 9 | 4000 | Materials Handling | No of materials issues made | 75 | 47 | 28 | 12000 | Scheduling etc.Overhead costs are attributed to products on the basis that it is activities that cause costs to arise.

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| No of production runs | 36 | 22 | 14 | 27000 | | | | | | 113000 | Calculate the total cost of production for Product X and Product Y based on c) Absorption costing based on direct labour hours d) Activity based costing Question 2 The Lomond Company operates an activity based costing system.

The following costs and other data have been estimated for the coming period.

a) On the absorption based costing system based on machine hours b) On the activity based costing system c) Prepare a report for your Manager accurately describing activity based costing and advising the Managing Director of the advantages of moving to such a method.

Question 3 The Delta Davis Company operates an activity based costing system.

| | | The Cost Drivers and Cost Pools associated with each of these activities are detailed below: | | Activity | Cost Driver Identified | Cost Pools | £ | Materials Handling | Material requisitions | Materials handling cost pool | 100,000 | Production Set-up | Production Runs | Production set-up cost pool | 140,000 | Calculate the total cost of production for Simple and Complex based on a) Absorption costing using direct labour hours b) Activity based costing using suitable cost drivers Question 1 Using Absorption Costing During August 2012 the company produces 3,500 units each of product X and product Y.

The total budgeted indirect production costs are £113,000.

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.

ABC is an ideal manner to pull off activities and better the quality of activities by inquiring “ why ” and “ how good ” activities are adding value to merchandises and services. The chief concern in the field of accounting is to detect the different factors that contribute the success of direction accounting system.

Activity Based Costing ( ABC ) is to a great extent used in the direction accounting for more than a decennary.


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