Activity Based Costing Calculation Examples, Concepts, Illustrations, Sample Help Online
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Concept of Activity Based Costing Calculation
Activity based costing or (ABC) is the better way of assigning the manufacturing overhead costs to products than the traditional approach of simply allocating costs on the basis of machine hours. It first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities to the products that have actually used those activities while manufacturing the product.
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Activity Based Costing Calculation Examples Explanation
Let us take an example to understand the process of allocation of cost to products.
Activity Cost Driver (activity) Overhead Cost Estimated Units Rate at per
Purchasing Materials Pieces of materials $ 200,000 100,000 pieces $ 2
Machine Setups Machine setups 800,000 400 setups 2,000
Inspection Inspect hours 400,000 4,000 inspect. hours 100
Running Machine running hours 600,000 20,000 mach. Hours 30
Total Overhead $ 2,000,000
Following information about two products
Product A Product B
Purchasing Materials 6,000 pieces 4,000 pieces
Machine Setups 10 setups 30 setups
Inspections 200 hours 200 hours
Running Machine 1,500 hours 1,500 hours
Purchasing Materials Product A $ 12,000 (6,000 pieces x $2 per piece)
Product B $ 8,000 (4,000 pieces x $2 per piece)
Machine Setups A 20,000 (10 setups x $2,000 per setup)
B 60,000 (30 setups x $2,000 per setup)
Inspections A 20,000 (200 hours x $100 per hour)
B 20,000 (200 hours x $100 per hour)
Running Machine A 45,000(1,500 hours x $30 per hour)
B 15,000 (500 hours x $30 per hour)
Total Overhead A $ 97,000
B $ 103,000
Traditional method A$150,00
Activity-based costing A 97,000
The total overhead cost for the month is the same at $200,000 but the amount allocated to each product is different.
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