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    This Examples Are Adapted FROM Cost and Management Accounting (1996) Prentice Hall ISBN 0-13-205923-1

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    pandy1604
    This document presents a cost analysis of three product lines (A, B, C). It calculates costs using different allocation methods: direct method based on labor hours, multiple allocation method based on machine hours and orders, and activity-based costing (ABC). ABC identifies cost drivers like machine hours, set-ups, orders to allocate overhead. It shows product C absorbs most overhead due to high machine usage. Direct method does not capture this, allocating based only on labor. ABC provides more accurate product costs than traditional methods.

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    This Examples Are Adapted FROM Cost and Management Accounting (1996) Prentice Hall ISBN 0-13-205923-1

    Uploaded by

    pandy1604
    76 views10 pages
    This document presents a cost analysis of three product lines (A, B, C). It calculates costs using different allocation methods: direct method based on labor hours, multiple allocation method based on machine hours and orders, and activity-based costing (ABC). ABC identifies cost drivers like machine hours, set-ups, orders to allocate overhead. It shows product C absorbs most overhead due to high machine usage. Direct method does not capture this, allocating based only on labor. ABC provides more accurate product costs than traditional methods.

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    Cost

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    xls_costmanagement

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    This document presents a cost analysis of three product lines (A, B, C). It calculates costs using different allocation methods: direct method based on labor hours, multiple allocation method based on machine hours and orders, and activity-based costing (ABC). ABC identifies cost drivers like machine hours, set-ups, orders to allocate overhead. It shows product C absorbs most overhead due to high machine usage. Direct method does not capture this, allocating based only on labor. ABC provides more accurate product costs than traditional methods.

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    76 views10 pages

    This Examples Are Adapted FROM Cost and Management Accounting (1996) Prentice Hall ISBN 0-13-205923-1

    Uploaded by

    pandy1604
    This document presents a cost analysis of three product lines (A, B, C). It calculates costs using different allocation methods: direct method based on labor hours, multiple allocation method based on machine hours and orders, and activity-based costing (ABC). ABC identifies cost drivers like machine hours, set-ups, orders to allocate overhead. It shows product C absorbs most overhead due to high machine usage. Direct method does not capture this, allocating based only on labor. ABC provides more accurate product costs than traditional methods.

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 10

    THIS EXAMPLES ARE ADAPTED

    FROM Cost and Management


    Accounting (1996)
    Prentice Hall
    ISBN 0-13-205923-1

    Chairs
    Cost Items A B C Total
    Sales and production (units) 300 100 50 450
    Raw materials usage (units) 35 20 40 14,500
    Direct materials cost ($/unit) $ 22.75 $ 13.00 $ 26.00 $ 9,425.00
    Direct labour hours (hour/unit) 5 6 3 2,250
    Direct labour cost ($/unit) $ 67.50 $ 81.00 $ 40.50 $ 30,375.00
    Machine hours (hour/unit) 4 2 5 1,650
    Number of production runs (runs/tota 6 2 1 9
    Number of deliveries (deliveries/total 3 5 10 18
    Number of receipts (receipts/total un 4 4 1 9
    Number of production orders (order/t 2 5 10 17
    Total area in warehouse (f2) 25000 15000 10000 50,000

    Overhead costs $
    Set up 5,000
    Machines 6,500
    Receiving 6,500
    Packing 8,500
    Engineering 6,500
    Insurance 4,500
    Utilities 15,500
    Total 53,000
    1. Calculate the labour hour rate. In this case, we will consider that overhead cost are absorbed on a labor hour basis

    Total overhead ($) 53000


    Number of hours 2250
    Labour rate ($/hour) 23.55556

    2. Calculate cost per unit


    Cost A B C
    Direct materials ($/unit) 22.75 13 26
    Direct labor ($/unit) 67.5 81 40.5
    Overhead ($/unit) 117.7778 141.3333 70.66667
    Cost/unit 208.0278 235.3333 137.1667
    ed on a labor hour basis
    Products
    A B C Total
    Sales and production (units) 300 100 50 450
    Raw materials usage (units) 35 20 40 95
    Direct materials cost ($/unit) 22.75 13 26 9425
    Direct labour hours (hour/unit) 5 6 3 2250
    Machine hours (hour/unit) 4 2 5 1650
    Direct labour cost ($/unit) 67.5 81 40.5 30375
    Number of production runs (runs/total units) 6 2 1 9
    Number of deliveries (deliveries/total units) 3 5 10 18
    Number of receipts (receipts/total units) 4 4 1 9
    Number of production orders (order/total units) 2 5 10 17
    Total area in warehouse (f2) 5000 2500 1500 9,000

    Overhead costs $
    Set up 5000
    Machines 6500
    Receiving 6500
    Packing 8500
    Engineering 6500
    Total 53000
    1. Select activities to absorb overhead. Thi method is transition from traditional to ABC method
    In this case, two activities are selected to absorb overhead
    ~Paperwork handling based on number of orders, engineering
    ~Other overhead based on machine usage

    2. Calculate the distributing basis for each case


    Material handling rate. This is based on the number of receipts
    Number of orders 17
    Total cost of Scheduling 6500
    Cost of each order ($/order) 382.3529
    Other overhead rate. This is calculated considering machine used hours. The previous overhead must be substracted
    Other overheads 46500
    Number of machine hours 1650
    Other overhead rate ($/hour) 28.18182

    3. Now we calculate the unit cost based on previous calculations


    A B C
    Direct material 22.75 13 26
    Direct labour 67.5 81 40.5
    Overhead from Scheduling 2.54902 19.11765 76.47059
    Other overhead 112.7273 56.36364 140.9091
    Unit cost 205.5263 169.4813 283.8797
    ead must be substracted
    Products
    A B C Total
    Sales and production (units) 300 100 50 450
    Raw materials usage (units) 35 20 40 14500
    Direct materials cost ($/unit) 22.75 13 26 9425
    Direct labour hours (hour/unit) 5 6 3 2250
    Machine hours (hour/unit) 4 2 5 1650
    Direct labour cost ($/unit) 67.5 81 40.5 30375
    Number of production runs (runs/total units) 6 2 1 9
    Number of deliveries (deliveries/total units) 3 5 10 18
    Number of receipts (receipts/total units) 4 4 1 9
    Number of production orders (order/total units) 2 5 10 17
    Total area in warehouse (f )
    2
    25000 15000 10000 50000

    Overhead costs $
    Set up 5,000.00
    Machines 6,500.00
    Receiving 6,500.00
    Packing 8,500.00
    Engineering 6,500.00
    Insurance 4,500.00
    Utilities 15,500.00
    Total 53,000.00
    1. Identify cost drivers
    trace cost of inputs into cost pools
    trace cost of pools into product costs
    Cost pools Driver Value of driver
    Machine usage Hour rate $ 3.9
    Set ups cost/set up $ 555.6
    Receiving cost/receive $ 722.2
    Packaging cost/package $ 472.2
    Orders cost/order $ 382.4
    Insurance cost/f 2
    $ 0.1
    Utilities cost/f2 $ 0.3

    Overhead cost A B C
    Machine 15.76 7.88 19.70
    Set up cost 11.11 11.11 11.11
    Receiving cost 9.63 28.89 14.44
    Packaging cost 4.72 23.61 94.44
    Orders Cost 2.55 19.12 76.47
    Insurance cost 7.50 13.50 18.00
    Utilities cost 25.83 46.50 62.00
    Total overhead 77.10 150.61 296.17

    2. Calculate cost per unit


    Cost A B C
    Direct materials 22.75 13.00 26.00
    Direct labor 67.50 81.00 40.50
    Overhead 77.10 150.61 296.17
    Unit cost 167.35 244.61 362.67
    Unit cost A B C 1. Conclusions
    Direct Method 208.03 235.33 137.17 ABC helps to visualize that p
    Multiple allocation method 205.53 169.48 283.88 Direct method is based on l
    ABC 167.35 244.61 362.67 Mutiple allocation method
    Overhead is increasing, labo
    Overhead A B C
    Direct Method 117.78 141.33 70.67
    Multiple allocation method 115.28 75.48 217.38
    ABC 77.10 150.61 296.17

    Overhead as a % of total cost A B C


    Direct Method 57% 60% 52%
    Multiple allocation method 56% 45% 77%
    ABC 46% 62% 82%
    . Conclusions
    ABC helps to visualize that product C is absorbing a large amount of overhead
    Direct method is based on labor and does not give any information on how
    Mutiple allocation method is a good approximation of ABC results
    Overhead is increasing, labor could be only 5% to 10% of total cost

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