# (Solved): Activity Based Costing

Activity Based Costing

IE Department Manufacturing Makes two Products (A and B). The management decides to use the following Activities and Cost Drivers. Activities Cost/year Cost Driver Consumption of Cost Driver per year Purchasing, Storage and material handling S 250,000 Raw material cost \$ 1,000,000 Engineering and Product Design \$ 300,000 Hours in design 5,000 hours Set up Costs \$ 100,000 Number of setups 1,000 setups \$ 300,000 M/c. Depreciation and maintenance Machine hours 100.000 hours \$ 250,000 Factory depreciation taxes insurance and utilities Machine hours 100,000 hours Other manufacturingS 200,000 overhead costs Machine hours 100,000 hours Total S 1,400,000 The requirements of two of the products (A and B) are as follows: Product A (per 15,000 units) Product B (per 10,000 units) 50 hours Direct Labor Hours Raw-Material cost Hours in Design Set ups Machine hours 24 hours \$ 36,000 25 S 50,000 30 24

Solution:

(A) Calculation of overhead cost per unit of products A and B using Activity based costing

 Activities Cost per unit of Cost Driver (Refer Note 1) Cost per 15,000 Units of Product A Cost per 10,000 Units of Product B Purchasing, Storage and material handling \$0.25 \$12,500 (50,000*0.25) \$9,000 (36,000*0.25) Engineering and Product Design \$60.00 \$600 (10*60) \$1,500 (25*60) Set up Costs \$100.00 \$300 (100*3) \$500 (100*5) M/c Depreciation and maintenance \$3.00 \$90 (3*30) \$72 (3*24) Factory depreciation taxes insurance and utilities \$2.50 \$75 (2.5*30) \$60 (2.5*24) Other manufacturing overhead cost \$2.00 \$60 (2*30) \$48 (2*24) \$13,625 \$11,180 Total: \$1,400,000 Per Year \$13,625 \$11,180 for 15,000 Units for 10,000 Units Overhead cost per unit (Use 3 decimal place) \$0.908 (13,625 / 15,000) \$1.118 (11,180 / 10,000)

Note 1 — Cost per unit of cost driver

 Activities Cost/year Cost Driver Consumption of Cost Driver per year Cost per unit of Cost Driver (Cost per year / Consumption of Cost Driver Per Year) Purchasing, Storage and material handling \$250,000 Raw material cost \$1,000,000 \$0.25 Engineering and Product Design \$300,000 Hours in design 5000 Hours \$60.00 Set up Costs \$100,000 Number of setups 1,000 Setups \$100.00 M/c Depreciation and maintenance \$300,000 machine hours 100,000 hours \$3.00 Factory depreciation taxes insurance and utilities \$250,000 machine hours 100,000 hours \$2.50 Other manufacturing overhead cost \$200,000 machine hours 100,000 hours \$2.00 Total \$1,400,000

(B) Overhead Cost per unit of Products A and B, based on direct labor hours.

Total Direct Labor Hours per year = \$3,500 DLHs

Total Estimated Overheads per year = \$1,400,000

Overhead Cost per Direct Labor Hour = Total Estimated Overheads per year \$1,400,000 / Total Direct Labor Hours per year \$3,500 DLHs

= \$400 per DLH

Overhead Cost per direct labor hour = \$400.00 per hour

Product A

Overhead Cost per Unit for Product A = (Direct Labor Hours for Product A 50 Hours x Overhead Rate \$400 per DLH) / 15,000 Units

= \$20,000 / 15,000 Units

= \$1.33 per unit of product A

Product B

Overhead Cost per Unit for Product B = (Direct Labor Hours for Product B 24 Hours x Overhead Rate \$400 per DLH) / 10,000 Units

= \$9,600 / 10,000 Units

= \$0.96 per unit of product B

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