Answer To Management Accounting Question No:ABC2 on Activity Based Costing
Refer to Accounting Test Question No.ABC2
(a) Computation of the activity based overheads
Step 1: Compute cost per unit of cost driver
= Cost pool / cost driver volume
|
Activity |
Cost pool (a) |
Cost driver volume/yr (b) |
Cost/unit of cost driver (a)/(b) |
|
Purchasing |
$75,000 |
1,500 |
$50/purchase order |
|
Setting |
$112,000 |
2,800 |
$40/batch |
|
Materials handling |
96,000 |
8,000 |
$12/movement |
|
Inspection |
$70,000 |
2,800 |
$25/batch |
|
Machining |
$150,000 |
50,000 |
$3/machine hour |
Step 2: Compute the volume of cost drivers consumed by Product XX
|
Purchase orders (given) =25 |
|
Batches=15,000/100=150 |
|
Materials movement=150 batches x6=900 |
|
Machine hours=15,000 units x 0.1=1,500 |
Step 3: Compute the Activity Based Overheads cost for Product XX
|
Activity |
|
|
|
Purchasing |
25 orders x $50 |
$1,250 |
|
Setting |
150 batches x $40 |
$6,000 |
|
Material handling |
900 movements x $12 |
$10,800 |
|
Inspection |
150 batches x $25 |
$3,750 |
|
Machining |
1,500 hours x $3 |
$4,500 |
|
Total |
|
$26,300 |
(b) Computation of budgeted overheads costs for Product XX using absorption costing
Budgeted overheads
=($75,000+$96,000+$112,000+$70,000+$150,000)
=$503,000
Budgeted absorption cost/machine hour
=$503,000/50,000
=$10.06
Budgeted machining hours for Product XX=1,500
Budgeted absorbed overhead
=1,500 x $10.06
=$15,090
В© Ways in which the company can reduce the ABC for product XX:
- Reduce the number of batches by increasing the batch size which will then reduce the setting overhead, materials handling and inspection costs.
- Reduce the number of purchase orders
- Innovate ways of speeding up production so that the machining hours are reduced.
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November 23, 2007
Tags: Activity based costing questions and answers
Posted in: Activity-Based Costing
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