Answer To Accounting Test Question No. 1 On Activity Based Costing

Refer to Accounting Test Question No.1

(a) Computation of the activity based costs and profits for each contract.

Step 1: Compute cost per unit of cost driver

= Cost pool / cost driver volume

Step 2: Compute the cost drivers consumed by each contract

Step 3: Finally, compute the Costs And Profit For Each Contract

Under Activity Based Costing Methodology

Costs And Profits For Each Contract

(b) Computation of profit based on absorption costing using moulding hour

First compute the overhead absorption rate

=Total annual overheads/annual moulding hour

=($150,000+$125,000)/2,000

=$175 per moulding hour.

Under Absorption Costing Methodology

Costs And Profits For Each Contract

Notes:

1. Based on activity based costing, Customer AAA’s contract would be unprofitable while Customer BBB’s contract is worth accepting. (Refer earlier article on ABC able to give a true cost)
2. If we use the traditional costing accounting/method which is the absorption costing basis, the management will think that both contracts were profitable.
3. Using activity based costing, the management should only accept only 1 contract which is Customer AAA’s contract.