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| Corporate practice bd |
What is Activity costing:
Activity-based costing (ABC) is a cost accounting method or
technique that identifies activities
wise cost structure of a manufacturing company and assigns the value of every activity to all or any products and services .Therefore, this model assigns more
indirect costs (overhead) into direct costs compared to standard costing.
The different steps of ABC costings are mention bellow-
The different steps of ABC costings are
mention bellow-
01. Identification of major activities
involved within the production
process;
02.Classification of every activity per the value hierarchy;
03. Identification and accumulation of total
costs of every activity
04.Identification of the foremost appropriate cost
driver for every activity
05. Calculation of total units of the value driver relevant to every activity;
06. Calculation of the activity rate i.e. the value of every activity per unit of its relevant cost driver;
07Application of the price of every activity
to products supported its
activity usage by the department.
Cost pool Cost driver Cost Hierarchy
Machining parts Number of machine hours Unit level
Purchasing Number of purchase orders or ordering hours Product or batch level
Receiving and Storing Number of purchase orders or shipments received Product or batch level
Engineering Number of engineering work orders or hours Product level
Packing Number of shipments, number of cubic feet or packing hours Product or batch level
Shipping Number of pounds shipped Product or batch level
Machine Setup Number of setups or setup time Batch level
Materials handling Number of times handled or material handling hours Product or batch level
Inventory control and Number of part numbers or administrative hours Product or batch level
materials planning
Inspection and Number of inspections or inspections time Product or batch level
quality control
Let,s start with Practical Example - (CMA-April-2015)
Practical Example. (01) (Try yourself)
The wimax company LTD. has the cost pools and cost driver used the company for all its components are as follows-
Cost
pool Amount TK. Cost
driver Basis
Machining 10,64,000.000 Machine hours 380000
Assembly 5,80,000.000 Direct labor hours 725000
Setup cost 1,20,000.000 Set up 60.00
Order processing 84,000.000 Customer order 24000
Stores and purchasing 1,56,960.000 Requisition raised 18000
Additional information
Due to constant challenges in market the company is looking only at the next year when it is expected that 40,000 units produce and sold. Target selling price 40.00 per unit. Company expect 15% margin on sales on all its product.
Each units require Tk.10.00 Direct material needed 02 (Two) Machine hours number of direct labor hour each unit will be 01(one) hour and direct labor cost per hour assemble Tk.12.00
during the year production 40000 units will require
Number of set up = 10
Number of order = 6000
Number of requisition to raised= 2500
Requirement
01.Calculate the estimated cost per unit of producing fine jelly and advise the company as to whether it should proceed with is production.