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Activity-Based Costing for Screwdriver Manufacturing

The document outlines a case study for Screwdriver Ltd, which manufactures two types of screwdrivers and is transitioning from a traditional absorption costing system to Activity-Based Costing (ABC). It provides detailed cost information, including material costs, labor costs, overhead allocations, and activity analysis for indirect costs. The document requires calculations for unit costs under both costing systems and a comparison of the results to explain any differences.

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3 views1 page

Activity-Based Costing for Screwdriver Manufacturing

The document outlines a case study for Screwdriver Ltd, which manufactures two types of screwdrivers and is transitioning from a traditional absorption costing system to Activity-Based Costing (ABC). It provides detailed cost information, including material costs, labor costs, overhead allocations, and activity analysis for indirect costs. The document requires calculations for unit costs under both costing systems and a comparison of the results to explain any differences.

Uploaded by

marisamunien8
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

MANAGERIAL ACCOUNTING AND FINANCE 3A

WEEK 3: ACTIVITY-BASED COSTING


CLASS EXAMPLE:
Screwdriver Ltd manufacturers two types of screwdrivers, namely the Crosshead and the Flathead. The company
currently uses a traditional absorption costing system. Recently the financial director attended a seminar on Activity-
Based Costing and has asked you, the management accountant, to design an Activity-Based Costing system for the
company.

In your discussions with the production manager, you have identified that both screwdrivers use the same type of
metal in different quantities. This metal costs R100 per kilogram. The crosshead screwdriver uses a total of 100 grams
per screwdriver while the flathead screwdriver only uses 70% of the material used by the crosshead. The flathead
screwdriver is simple to manufacture and only requires half an hour of unskilled labour at R6 per hour. The crosshead
screwdriver, however, is more complicated and requires half an hour of semi-skilled labour at R10 per hour. Total
overheads to be allocated amount to R650 000. Under the current costing system, overheads are allocated based on
machine hours. Each screwdriver takes one machine hour to manufacture.

The marketing department anticipates that 20 000 flathead and 5 000 crosshead screwdrivers will be sold in the next
financial year. Production will meet sales demand, which approximates normal capacity.

You have carried out an activity analysis for the indirect costs and identified the following activities and related costs
per annum:

Activity Cost
R
Set up 50 000
Receiving 90 000
Inspection 160 000
Dispatch 100 000
Maintenance 250 000
650 000

You have also identified the following cost drivers and usage per screwdriver type:

Cost Driver Cost driver volume per annum


Flathead Crosshead
No. of set ups 30 20
No. of raw material orders 200 100
No. of inspections 750 250
No. of external orders 160 40
Maintenance hours 3500 1 500

Required:

1. Calculate the cost per unit for flathead and crosshead screwdrivers using the current costing system.
2. Calculate the cost per unit for flathead and crosshead screwdrivers using an activity-based costing system.
3. Compare the cost per unit obtained under both the current and ABC systems and explain the reason for the
difference.

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