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

© 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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