Activity Based Costing 22

Activity Based Costing 22

Activity Based Costing

Worked Example



The following information provides details of the costs, volume and transaction cost drivers for a period in respect of XYZ Ltd:



Products A B C Total

Sales and production (units) 90,000 30,000 15,000 135,000

Raw materials usage (units) 10 7 14 1,320,000

Direct materials cost (£) 30 40 15 4,125,000

Direct labour hours 2.5 3 1.5 337,500

Machine hours 5 3 7.5 652,500

Direct labour cost (£) 20 30 10 2,850,000

Number of production runs 5 10 50 65

Number of deliveries 18 7 50 75

Number of receipts 50 70 700 820

Number of production orders 45 25 60 130



Overhead costs £

Set up 75,000

Machines 1,000,000 ... Show more content on Helpwriting.net ...The receiving overhead rate is



Total receiving overheads

Total number of receipts £900,000

820



£1,097.56 per receipt



Using this rate as a constant allows us to evaluate the product overhead apportionments: overheads per receipt x receipts per product group



For product A:



£1,097.56 per receipt x 50 receipts



£54,878



Product A B C

Receiving overheads apportionment £54,787.0 £76,829.3 £768,292.7



We then divide these product apportionments by the number of units made for each product, to derive the cost per unit for receiving goods. The calculations here give the following results:



Product A B C

Receiving cost per unit £0.60976 £2.5610 £51.2195



Notice, when compared with Drury 's method of using the overhead rate as a percentage of direct materials cost, the version presented here gives a radically different result. Had we applied Drury 's method, the product receiving cost per unit would have been:



Overhead absorption rate:



£900,000 x 100 = 21.82%



= £4,125,000



Applying this rate to each product 's material costs gives:



Product

A B C

£6.55 8.73 3.27



The method we have used applies the full spirit of ABC by identifying and using fully the ABC approach. The other overhead rate, the Machine Hour Rate, is £3.79. This is calculated by dividing the total other overheads by the number of machine hours applied, or worked. In

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