Activity Based Costing

Format 1: Activity
Format 2: Traditional & ABC system
Format 3: Activity Cost Pool

SL. Activity cost pool Cost driver

1. Material receiving Batch level
2. Final inspection Batch level
3. Material handling Batch level
4. Machine set up Batch level
5. Production scheduling Batch level
6. Requesting and moving material Batch level
7. Receiving raw material from suppliers Batch level
8. Setting up production Batch level
9. Issue purchase unit for a job Batch level
10. Production scheduling Batch level
11. Material receiving Batch level
12. Parts administration Product level
13. Product improvement Product level
14. Paying supplier Product level
15. Designing molds Product level
16. Inspecting products Product level
17. Modifying molds Product level
18. Interviewing employees in personnel department Product level
19. Research and development Product level
20. Manage part inventory Product level
21. Machine maintenance Facility level
22. Heating the factory Facility level
23. Insuring equipment Facility level
24. Machine operation Unit level
25. Machining Unit level
26. Design new product Unit level
27. Machine operation Unit level
28. Designing molds No of product
29. Creating molds No of product
30. Inspecting products No of product
31. Modifying molds No of product
32. Product improvement No of product
33. Product design No of product
34. Customer order No of product
35. Order size Machine hour
36. Machine operation Machine hour
37. Customer relation No of customer
38. Order taking Customer batch level
39. Order processing Customer batch level

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 40. Deliver Customer batch level
41. Sales return Customer batch level
42. Customer visit Customer sustaining
43. Monthly billing Customer sustaining
44. Subsequent reminder Customer sustaining
45. Travelling expense Customer sustaining
46. Collection cost for delay payment Customer sustaining
47. Restocking Customer unit level
48. Sale commission Customer unit level
49. Per unit shipment cost Customer unit level
50. Evaluating cost Customer batch level
51. Determination of allowance cost Customer batch level
52. Cost of capital Customer batch level
53. Sale salary and fringe benefit Salary sustaining
54. Sale office expense Salary sustaining
55. Sale executive salary Salary sustaining
56. Sale executive allowance Salary sustaining
57. Expense for dealer Distribution channel level
58. Commission for petty sale center Distribution channel level
59. Machine set up Set up hour
60. Production scheduling No of production order

Problem-1. Tushi Company produces Pen and Marker at full capacity. Data related two products are
given below:

Particulars Pen Marker

Units Produced 1,00,000 40,000
Labor hour 30,000 40,000
Machine set-up hours per product line 1,000 4,000
Inspection 2,000 3,000

Overhead cost:

Budgeted machine set-up related costs…………..Tk. 8,00,000

Inspection cost…………………………………… Tk. 6,00,000
Total overhead cost ……………………………..Tk. 14,00,000
Required:

a) Determine overhead cost per unit using the traditional costing method.
b) Determine overhead cost per unit of the products using ABC system.

Solution:

a) Calculation of overhead cost per unit using the traditional costing method:

We know that, overhead cost per unit = Budgeted overheads / Budgeted production units

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 = 14,00,000 / 1,40,000

= Tk. 10 per unit

b) Calculation of overhead cost per activity:

Step- (i): Calculation of overhead rate per activity:

Particulars Amount Activity Rate

Machine set-up hours per product line 8,00,000 5,000 160 Tk.
Inspection 6,00,000 6,000 120 Tk.

Step- (ii): Calculation of overhead cost per unit:

Particulars Product A Product B

Machine set-up hours per product line (1,000*160); (4,000*160) 1,60,000 6,40,000
Inspection (2,000*120); (3,000*120) 2,40,000 3,60,000
Total overhead cost 4,00,000 10,00,000
Unit produced 1,00,000 40,000

Overhead cost per unit Tk. 4.00 Tk. 25.00

Problem-2. Nubaid manufacturing company produces mathematical and financial calculators at full
capacity. Data related two products are presented below:

Particulars Mathematical calculator Financial calculator

Annual Production in Units 50,000 1,00,000
Direct material cost 1,50,000 3,00,000
Direct manufacturing labor cost 50,000 1,00,000
Direct labor hours 2,500 5,000
Machine hours 25,000 50,000
Number of production runs 50 50
Inspection hours 1,000 500

Total manufacturing overhead cost are as follows:

Machine cost Tk. 3,75,000

Set up cost Tk. 1,20,000
Inspection cost Tk. 1,05,000

Required:

a) Choose a cost driver for each overhead cost pool and calculate the manufacturing overhead cost per
unit for each product.

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 b) Compute the manufacturing cost per unit of each product.

Solution:

a) Calculation of manufacturing overhead cost per unit:

Step- (i): Calculation of Manufacturing overhead rate per activity:

Activity Cost driver Calculation Rate

Machinery Machine hours Tk. 3,75,000 / (25,000 + 50,000) = Tk. 5 Tk.
Setup Production runs Tk. 1,20,000 / (50 + 50) = Tk. 1,200
Inspection Inspection hours Tk. 1,05,000 / (1,000 + 500) = Tk. 70
Step- (ii): Calculation of Manufacturing overhead cost per unit:

Particulars Mathematical Financial

Machine (25,000*5); (50,000*5) 1,25,000 2,50,000
Setup (50*1,200); (50*1,200) 60,000 60,000
Inspection (1,000*70); (500*70) 70,000 35,000
Total overhead cost 2,55,000 3,45,000
Unit produced 50,000 1,00,000

Overhead cost per unit Tk. 5.10 Tk. 3.45

b) Calculation of manufacturing cost per unit:

Particulars Mathematical Financial
Direct material cost 3.0 3.0
(1,50,000 / 50,000); (3,00,000 / 1,00,000)
Direct manufacturing labor cost 1.0 1.0
(50,,000 / 50,000); (1,00,000 / 1,00,000)

Manufacturing overhead cost (From required a) 5.10 3.45

Manufacturing cost per unit Tk. 9.10 Tk. 7.45

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Problem-3. Product A and Product B are manufactured at full capacity by Hannan Manufacturing
Company.

Particulars Product A Product B Total

Unit produced 49,000 200 50,000
Direct material cost per unit 20 120
Direct labor cost 22,000 3,00,000 25,00,000
Machine hours 11,000 960 11,960
Number of production runs 20 40 60
Engineering charges 400 600 1,000
Overhead cost:
Set up related cost 2,40,000
Engineering related cost 8,36,400
Machine cost 19,13,600
Total overhead cost 29,90,000

Required:

a) Determine overhead cost per unit using the traditional costing method.
b) Choose a cost driver for each overhead cost pool and calculate the overhead cost per unit for each
product.
c) Compute the manufacturing cost per unit of each product.

Problem-4. Mim Company produces two electronic products of refrigerator and woven at capacity. Data
related two products are presented below:

Particulars Refrigerator Woven

Annual Production in Units 2,50,000 5,00,000
Direct material cost 7,50,000 15,00,000
Direct manufacturing labor cost 2,50,000 5,00,000
Direct manufacturing labor hours 12,500 25,000
Machine hours 1,25,000 2,50,000
Number of production runs 250 250
Maintenance hours 5,000 2,500

Total manufacturing overhead cost are as follows:

Machine cost Tk. 3,75,000
Set up cost Tk. 1,20,000
Maintenance cost Tk. 1,05,000

Required:
a) Calculate the manufacturing overhead cost per unit for each product.
b) Compute the manufacturing cost per unit of each product

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Problem-5. A Company produces two products, L and M, using the same equipment and similar
processes. An extract of the production data for these products in one period is shown below:

Particulars L M
Quantity produced 5,000 7,000
Direct labor hours 10 20
Machine hours 30 10
Set up in the period 10 40
Orders handling in the period 15 60

Total manufacturing overhead cost are as follows:

Machine cost Tk. 2,20,000
Production run Set up cost Tk. 20,000
Handling cost Tk. 45,000

Required:
a) Determine overhead cost per unit using the traditional costing method.
b) Calculate the manufacturing overhead cost per unit for each product.
b) Compute the manufacturing cost per unit of each product.

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