of 19
8/17/2019 Activity Based Costing111
1/19
HAFIZ MUHAMMAD WAQASHANIF
MP15-20
8/17/2019 Activity Based Costing111
2/19
ABC has been develoed as an al!e"na!#ve$os!#n% s&s!e' !o !"ad#!#onal ove"head abso"!#ons&s!e'(
In !"ad#!#onal $os!#n% s&s!e' all #nd#"e$! $os!s
$ha"%ed !o "od)$!s )s#n% *ve"head Abso"!#on+a!e, h#$h dose no! "e$o%n#.e !he $a)sal /a$!o"so/ ove"head(
In as! ove"head $os! a$$o)n!ed /o" a ve"& s'all
"oo"!#on o/ !o!al $os!( he#" abso"!#on on !hebas#s o/ ove"all abso"!#on "a!e d#d "od)$e e""o"s#n !he "od)$! $os!(
8/17/2019 Activity Based Costing111
3/19
P"od)$! Cos!s
◦ D#"e$! 'a!e"#als
◦ D#"e$! labo)"
◦ Fa$!o"& *ve"head
D#"e$! labo" andd#"e$! 'a!e"#als a"e
eas& !o !"a$e !o"od)$!s(
he "oble'$o'es #!h/a$!o"& ove"head(
8/17/2019 Activity Based Costing111
4/19
&#$all& )sed one +A !o allo$a!eove"head !o "od)$!s(
h#s "a!e as o/!en based on d#"e$! labo"
dolla"s o" d#"e$! labo" ho)"s( h#s 'ade sense, as d#"e$! labo" as a
'ao" $os! d"#ve" #n ea"l& 'an)/a$!)"#n%lan!s(
8/17/2019 Activity Based Costing111
5/19
General LedgerPayroll taxes $1,000
Machinemaintenance
$500
Purchasing Dept.
labor
$,000
!ringe bene"ts $#,000
Purchasing Dept.upplies
$#50
%&uipment
depreciation
$'50
%lectricity $1,#50
(nemploymentinsurance
$1,500
h#s !he !o!alove"head ee"e %#ven, !he!o!al a'o)n! #s
311,250
o!al d#"e$! labo"ho)"s a"e 1,000(
8/17/2019 Activity Based Costing111
6/19
he "a!e o)ld be4◦ *H +a!e *ve"head6D#"e$! 7abo" Ho)"s
◦ 311,25061,000 311(25 e" ho)"(
Aln% ove"head )s#n% !h#s "a!e4◦ P"od)$! A4 800 ho)"s 9 311(25 38,500
◦
P"od)$! B4 :00 ho)"s 9 311(25 3:,;50
◦ o!al ove"head al#ed 311,250
8/17/2019 Activity Based Costing111
7/19
A$!#v#!& based $os!#n% #s an a"oa$h !o$os!#n% and 'on#!o"#n% o/ a$!#v#!#es h#$h#nvolves !"a$#n% "eso)"$e $ons)'!#on and$os!#n% e$! "ela!#onsh# #!h !he"eso)"$es $ons)'ed(
8/17/2019 Activity Based Costing111
8/19
*ve"head $os! d"#ve"s a"e de!e"'#ned(
A$!#v#!& $os! ools a"e $"ea!ed(
◦ A a$!#v#!& $os! ool #s a ool o/ #nd#v#d)al $os!s!ha! have !he sa'e $os! d"#ve"(
Cal$)la!e $os! d"#ve" "a!e
Cos! ool6$os! d"#ve"
8/17/2019 Activity Based Costing111
9/19
Ass)'e !ha! a $o'an& 'a?es !o"od)$!s A @ B(
Mana%e'en! de$#des !o #ns!all an ABCs&s!e'
8/17/2019 Activity Based Costing111
10/19
Mana%e'en! de$#des !ha! all ove"head$os!s onl& have !h"ee $os! d"#ve"s
◦ D#"e$! labo" ho)"s
◦ Ma$h#ne ho)"s
◦ N)'be" o/ )"$hase o"de"s
8/17/2019 Activity Based Costing111
11/19
D#"e$! 7abo"
Ma$h#ne Ho)"s
No( o/ P)"$hase *"de"s
General LedgerPayroll taxes $1,000
Machinemaintenance
$500
Purchasing Dept.
labor
$,000
!ringe bene"ts $#,000
Purchasing Dept.upplies
$#50
%&uipment
depreciation
$'50
%lectricity $1,#50
(nemploymentinsurance
$1,500
8/17/2019 Activity Based Costing111
12/19
D#"e$! 7abo"
Ma$h#ne Ho)"s
No( o/ P)"$hase *"de"s
General LedgerPayroll taxes $1,000
Machinemaintenance
$500
Purchasing Dept.
labor
$,000
!ringe bene"ts $#,000
Purchasing Dept.upplies
$#50
%&uipment
depreciation
$'50
%lectricity $1,#50
(nemploymentinsurance
$1,500
31,000 2,000 1,50038,500
Overhead driver by direct
labor hours
8/17/2019 Activity Based Costing111
13/19
D#"e$! 7abo"
Ma$h#ne Ho)"s
No( o/ P)"$hase *"de"s
General LedgerPayroll taxes $1,000
Machinemaintenance
$500
Purchasing Dept.
labor
$,000
!ringe bene"ts $#,000
Purchasing Dept.upplies
$#50
%&uipment
depreciation
$'50
%lectricity $1,#50
(nemploymentinsurance
$1,500
31,000 2,000 1,50038,500
Which overhead costsare driven by machine
3 500 ;50 1,25032,500
8/17/2019 Activity Based Costing111
14/19
D#"e$! 7abo"
Ma$h#ne Ho)"s
No( o/ P)"$hase *"de"s
General LedgerPayroll taxes $1,000
Machinemaintenance
$500
Purchasing Dept.
labor
$,000
!ringe bene"ts $#,000
Purchasing Dept.upplies
$#50
%&uipment
depreciation
$'50
%lectricity $1,#50
(nemploymentinsurance
$1,500
31,000 2,000 1,50038,500
Overhead costs aredriven by number of
3 500 ;50 1,25032,500
38,000 25038,250
8/17/2019 Activity Based Costing111
15/19
D#"e$! 7abo"
Ma$h#ne Ho)"s
No( o/ P)"$hase *"de"s
31,000 2,000 1,50038,500
3 500 ;50 1,25032,500
38,000 25038,250
)gain the *ormulas is+
Costs in Activity CostPool/Base = rate)ssume the *olloingbases+
Direct labor hours = 1,000Machine hours = 250Purchase orders = 100
$,500/1,000 = $!50 "er directlabor hour $2,500/250 = $10 "er #achine hour
$ ,250/100 = $2!50 "er "urchase order
he ABC rates are%
8/17/2019 Activity Based Costing111
16/19
Product ) -ase ate )llocated
Direct labor
hours 00
$
.50
$
1,/00.00
Machine hours 100 $
10.00$
1,000.00
Purchaseorders 50
$#.50
$#,1#5.00
otal
$
,2#5.00
Let3s do the same thing *or the other to rates, to get theo* o4erhead applied to Product )+
8/17/2019 Activity Based Costing111
17/19
7e!s do !he sa'e !h#n% /o" !he o!he" !o "a!es, !o %e! !he !o!al ao/ ove"head al#ed(
idget - -ase ate )llocated
Direct laborhours :00
38(50 3 2,;00(00
Machine hours 150 3 10(00 3 1,500(00
Purchase orders 50 3 82(50 3 2,125(00
otal 3 :,25(00
he a$!)al ove"head allo$a!ed #sP"od)$! A 3 8,25P"od)$! B 3 :,25 o!al 3 11,250
8/17/2019 Activity Based Costing111
18/19
Product ) Product - otal
raditionalMethod
$,500 $6,'50 $11,#50
)cti4ity -ased7osting
$,2#5 $6,8#5 $11,#50
Di9erence :$#5 $#5 :0:
&hich is #ore accurate?
8/17/2019 Activity Based Costing111
19/19
HANES
