Management Accounting – Activity based Costing
Question
XYZ Ltd. currently make and sells four products. They provide you with their details and relevant information for one period in the following table. As you have recently just learnt about activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the four products.
Product A B C D
Outputs in Units 120 100 80 120
Cost per unit (£) (£) (£) (£)
Direct material 40 50 30 60
Direct labour 28 21 14 21
Machine hours (per unit) 4 3 2 3
The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units.
The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:
Machine department costs (rent, business rates, depreciation and supervision)
£10,430
Set-up costs £5,250
Stores receiving £3,600
Inspection/Quality control £2,100
Material handling and dispatch £4,620
You have ascertained that the ‘cost drivers’ to be used are as listed below for the overhead costs shown:
Cost Cost Driver
Set-up costs Number of production runs
Stores receiving Requisition raised
Inspection/Quality control Number of production runs
Material handling and dispatch Orders executed
The number of requisitions raised in the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product. You are required
to calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis; (8 marks) to calculate the total costs for each product using activity-based costing; (14 marks) to calculate and list the unit product costs from your figures in (a) and (b) above, to show the differences and comment briefly on any conclusions which may be drawn which could have pricing and profit implications. (5 marks)
Large service organisations, such as banks and hospitals, used to be noted for their lack of standard costing systems, and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques.
Requirement:
Explain the uses of activity-based costing in the service industries.
