Activity Based Costing

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  • Topic: Costs, Gross margin, Cost
  • Pages : 7 (2112 words )
  • Download(s) : 19
  • Published : May 27, 2013
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Introduction
The current approach being used by Scotty Accents is the traditional costing system. The main weakness of this system in reference to the assignment is this system will allocate the factory overhead cost towards only one driver, and that one driver will be machine labour hours. This will lead to cost not appropriately assigned because they will neglect other cost drivers that may contribute to the cost of an item. As reference to the case, Scotty Accents Company only considers hours and volume as their allocation basis to calculate the unit cost for both Brass and Chrome. In fact, there might be other cost drivers that can be considered as the allocation of cost base.

Identification of key background information

The proposed activity based approach is the activity based costing (ABC) system. As what we learn from the course to date, ABC is a costing system that is more accurate and detailed compared to the conventional costing system. This is due to the fact that the system allocates the direct expenses and overhead with the most important cost drivers used by the company for its product. The general advantages that the company will get for example will be the fact that the managers can focus on the areas/activities that are most important and by doing so they can generate more profit and increase cost efficiency. Other than that, the ABC system will give managers higher control over high-demand products, meaning they can prioritize on products that are generating more profit over the less-demanded products. Companies will normally segment their products based on classes, class A will normally be the product that is giving most profit, followed by class B and class C. The ABC system will overcome the problems faced from using the conventional costing system by using more cost drivers, for example from the case they used soldering, shipments, quality control and others as their cost drivers to allocate the cost of the item compared to the conventional system where they only use direct manufacturing labor and machine cost.

Analysis

A. Calculation
Activity cost rates for indirect-cost pools:
The rate per unit of each cost-allocation base| =Total activity costs/Total units of the Cost-Allocation Base| | |
1. Soldering (number of solder points)| = $23,550/1,570,000| | = $0.015 per solder point|
| |
2. Shipments (number of shipments)| = $21,500/20,00|
| = $1.075 per shipment|
| |
3. Quality control (number of inspections)| = $31,000/77,500| | = $0.40 per inspection|
| |
4. Purchase orders (number of purchase orders)| = $23,760/190,080| | = $0.125 per order|
| |
5. Machine power (machine-hours)| = $1,440/192,000|
| = $0.0075 per machine-hour|
| |
6. Machine setups (number of setups)| = $18,750/30,000|
| = $0.625 per setup|

Scotty Accents Company product costs using activity-based costing system:

| | 22,000| | 4000| | | |
| | Brass| | Chrome| | | |
| | Total ($)| Per unit ($)| | Total ($)| Per unit ($)| | Total ($)| | Cost description| | | | | | | | |
Direct cost| | | | | | | | | |
Direct materials| 114,400.00| 5.2000| | 58,400.00| 14.6000| | 172,800.00| | Direct manufacturing labor| 9,900.00| 0.4500| | 4,200.00| 1.0500| | 14,100.00| | Machine cost| 79,200.00| 3.6000| | 7,200.00| 1.8000| | 86,400.00| | Total direct cost| 203,500.00| 9.2500| | 69,800.00| 17.4500| | 273,300.00| | | | | | | | | | | |

Indirect cost of activities| | | | | | | | |
Soldering| | | | | | | | | |
Brass| =1,185,000*$0.015| 17,775.00| 0.8080| | | | | 17,775.00| | Chrome| =38,5000*$0.015| | | | 5,775.00| 1.4438| | 5,775.00| | Shipments| | | | | | | | | |
Brass| =16,200*$1.075| 17,415.00| 0.7916| | | | | 17,415.00| | Chrome| =3,800*$1.075| | | | 4,085.00| 1.0213| | 4,085.00...
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