Activity Based Costing ACTIVITY BASED COSTING Activity-based IA tool for refining a costing system by focusing on individual costing activities as fundamental cost objects Il. 1s a two-stage product costing method that first assigns costs to activities and then allocates them to products based on the each product's consumption of activities, Il Based on the concept that products consume activities and activities consume resources. 4Steps (1) Identify the activities that consume resouroes and assign costs to them. (2) Identity the cost driver(s) associated with each activity. A cost driver is any factor that causes, of ‘drives,” an activty’s costs. (3) Compute a cost rate per cost driver unit or transaction. Each activity could have multiple cost drivers. (4) Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product. 2 Stages 7 Stage: This consists of acivities. Each activity has an associated cost pool and requires a cost driver rate using te formula above. 2* Stage: Allocates costs to products by multiplying the cost driver rates by the number of units of the cost driver (ie, volume of activities) consumed in each product. Cost hierarchy “These are classification of cost drivers into general levels of activity, volume, batch, product, ete. Four possible levels of cost hierarchy are: (1) volume-elated - Output unit-level costs: costs of activities performed on each individual unit of product or service [cost river is a unit of output] (2) batch-elated - Batch-level costs: costs of activities related to a group of units of products or services [cost driver ‘group of units of output] (3) product-related - Product-sustaining costs (or service- 523 Se CamScannerActivity Based Costing — ‘sustaining costs): costs of activities undertaken to support | individual products or services regardless of the number of units. | ‘or batches in which the units are produced (4) facity related - Facility-sustaining costs: costs of activities that cannot be traced to individual products or services but ‘support the organization as a whole Cost drivers criteria | Three criteria basis: | (1) Causal relation. Ideally, choose a cost driverthat | causes the cost. | (2) Benefits received. Choose a cost diver to assign costs in proportion to benefits received. (3) Reasonableness or faimess. When the fist two criteria | fal, assign costs onthe basis of faimess or reaseatoes. | 524 csActivity Based Costing Problem A: The accountant of Hondakars Manufacturing collected the following information: tivity Overhead Cost driver Product X1 Product X2 costs Machining Dept. Setup 200,000 Number of setups 200 50 Machining 700,000 Machine hours 20,000 15,000 Packaging Dept. ‘Assembly 300,000 Direct labor hours, 40,000 60,000 Inspection 180,000 Number of 120 60 inspections 1. If Hondakars Manufacturing uses a plantwide rate based on direct labor hours to allocate overhead costs, how much is product X1’s share of overhead? a. P324,000. b. P416,000. cc. P638,000. d. P552,000. ‘Suggested solution: (0) P200,000 + P700,000 + P300,000 + P180,000 = 7,380,000. F °_ - 13.8 per direct labor hour. %0,000+60,000 13.8 x 40,000 direct labor hours = P552,000. 2, Ifthe department allocation method is used, what is the overhead rate for the Machining department with machine hours as the allocation base? a, P39.43 per machine hour. b. 13.71 per machine hour. . P20 per machine hour. d. P25.71 per machine hour. Suggested solution: (D) 700,000 + P200,000 = P900,000. 7200000 _ - 25.71 per machine hour. 3900+15,000 525 BconscanerActivity Based Costing 3, When activity-based costing is used, what is product X2's share of the Packaging department overhead costs? a, 270,000. b. 240,000. cc. P580,000. 4, P380,000. ‘Suggested solution: (8) P3000 —— TEES = P3 pr dct abor hour 180,000 120+60 1,000 per inspection. 3 peridiect labor x 601000 idirectilabor hours + P1,000 per inspection x 60 inspections = P240,000. 4. When activity-based costing is used, how much of the overhead cost is allocated to product X1? 580,000. 800,000. 950,000. 670,000. pegs ‘Suggested solution: (B) -FZ00000 = P00 per setup, 700,000 Zappers ono ~ P20 Pet machine hour. 800 per setup x 200 setups + P20 per machine hour x 20,000 machine hours + PS per direct labor hour 40,000 direct labor hours + P 1,000 per inspection x 120 inspections = P800,000. 526 BB canscanerActivity Based Costing PROBLEM B: VDO Savings and Loan had the following activities, traceable costs, and Physical flow of driver unis: Traceable Phisical fow of hates Costs Driver Units Open new accounts 50,000 1,000 accounts Process deposits 36,000 400,000 deposits Process withdrawals 15,000 200,000 withdrawals Process loan applications 27,000 900 applications The above activilies are used by the Mocayta branch and the Makati branch: Morayta Makati New accounts 200 400 Deposits 40,000 20,000 Withdrawals 18,000 18,000 Loan applications 100 160 5. Whats the cost por driver unit for new account activity? a, P09 b. P0075 ©. P30,00 4, P50,00 Suggested solution: (0) 50,000 7 1,000 = P50,00 per acoount 6. Whatis the cost per driver unit for the deposit activity? a. P0.09 b, POO7S o. P30.00 d. P50.00 ‘Suggested solution: (A) 36,000/400,000 = PO.09 7. Whats the cost per driver unit for the withdrawal activity? a. PO.09 b. P0075 . P3000 d. P50.00 827 csSuggested solution: (B) P15,000/200,000 = P0.075 8. What is the cost per driver unit forthe loan application activity? a PO09 b. POO7S cc. P30.00 d. P50.00 Suggested solution: (C) P2T,0007900 = P30.00 9. How much of the loan application cost will be assigned to the Morayta branch? P3,000 P4800 P7,800 . 27,000 Suggested solution: (A) 30,00 x 100 = P3,000 10. How much of the deposit cost will be assigned to the Makati branch? a. P1,800 b. P3600 . P5400 d. P 36,000 Suggested solution: (A) 0.09 * 20,000 = P1800 11. How much of the new account cost will be assigned to the Makati branch? a. P10,000 b. P20,000 c. P-30,000 “ (B) ‘400 * P50 = P20,000 528 BBocanscanner