SOLUTION EXERCISE

INDUSTRIAS 'SAN LUCHO SA' manufactures shirts and pants; currently it is

applying the costing of its products through the ABC method, and presents the following
data:
Materia Prima:
Se han adquirido 100.000 metros de tela, con un costo unitario de $5.00. La
the use of raw material in each product is:

PRODUCT QUANTITY
USED
PER UNIT
Shirt 1 m2
Pants 2 m2
Table 1. Materials
The production of the factory is:
PRODUCT QUANTITY
PRODUCED
Shirt 40,000
Pants 30,000
Table 2. Units produced
Labor:
A total cost of $120,000.00 corresponding to 5 employees, where 3 are dedicated to the
shirt manufacturing and 2 to pants manufacturing.

Indirect manufacturing costs:

DESCRIPCION VALUE
Industrial warehouse for rent $20,000.00
Depreciation of machinery $15,000.00
Factory cleaning expenses $30,000.00
Table 3. Indirect Manufacturing Costs.
Ventas:

PRODUCTO UNITS PRICE OF

SOLD Unit Sale
Shirt 30,000 $20.00
Pants 15,000 $30.00
Table 4. Selling price and units sold
Cost centers:
The company has the following cost centers:
Cut section
Assembly section
Packaging section
Purchasing section
Sales section
Central administration section
The cost activities by section are:
SECTION ACTIVITY CLASSIFICATION
Development of models Principal
Cut Dyeing of fabric Principal
Screen cut Principal
Sewing Principal
Assembly
Ornaments Principal
Packaging Principal
Packaging
Order shipment Principal
Order to suppliers Principal
Purchases Order receipt Principal
Payment to suppliers Auxiliary
Preparation of the catalog Principal
Ventas Order Management Principal
Customer billing Assistant
Human Resources Management Auxiliary
Administration
Accounting Auxiliary
central
Finance Auxiliary

Table 5. Activities by section

It is requested

a) Classify production costs.

b) Set distribution criteria for the CIF, and distribute to each cost center.
(sections)
c) Distribute costs assigned to each activity
d) Set criteria for distributing auxiliary activities, and allocate to the activities.
main
Determine the total cost of each main activity
e) Define the cost drivers for each activity and determine the cost
unitary per inductor
f) Calculate the unit cost of each production line
g) Determine the cost of sales for the income statement.
 DEVELOPMENT
We classify costs into direct and indirect.

COST CLASSIFICATION
Raw material Direct cost
Labor Direct cost
Industrial warehouse rental Indirect cost
Depreciation of machinery Indirect cost
Factory cleaning expenses Indirect cost
Table 1. Identification of costs

We set the distribution criteria for the CIF among the different sections.
INDIRECT COST ASSIGNMENT CRITERION
Rental % total area occupied
Depreciation of machinery Book value of the machinery
Cleaning % total area occupied

Table 2. CIF Assignment Criteria

After gathering the information in the company, the following data table is obtained:

INDIRECT COSTS
AMORTIZATION
CLEANING
SECTIONS RENTAL DE
(Surface
(Surface MACHINERY
busy
busy (Book value
m2)
m2) Middle.
Cut 160 300,000.00 160
Assembly 320 150,000.00 320
Packaging 320 75,000.00 320
Purchases 160 37,500.00 160
Sales 320 37,500.00 320
Central administration 320 150,000.00 320
TOTAL 1,600 750,000.00 1,600

Table 3. Distribution Estimates

With the information detailed above, we made a percentage calculation:
INDIRECT COSTS
AMORTIZATION
CLEANING
RENTAL DE
SECTIONS (Surface
Surface MACHINERY
occupied
occupied m2) Book value
m2)
Maq.)
Cut 10% 40% 10%
Assembly 20% 20% 20%
Packaging 20% 10% 20%
Purchases 10% 5% 10%
Sales 20% 5% 20%
Central Administration 20% 20% 20%
TOTAL 100% 100% 100%

Table 4. Percent distribution base

Subsequently, we proceeded to distribute the CIF according to Table No. 4.

We carried out the following calculation for each of the sections:
Distribution of industrial warehouse rental cost $20,000.00
CIF
Total cost % of
Distributed
Section from Rental Distribution
{3}=
{1} {2}
(1*2)
Cut 20000 10% 2,000.00
Mounting 20000 20% 4,000.00
Packaging 20000 20% of 4,000.00
Purchases 20000 10% 2,000.00
Sales 20000 20% 4,000.00
Central Adm. 20000 20% of 4,000.00
Total 100% 20,000.00
INDIRECT COSTS

SECTIONS TOTAL
AMORTIZATION
RENTAL DE CLEANING
MACHINERY
Cut 2,000.00 6,000.00 3,000.00 11,000.00
Assembly 4,000.00 3,000.00 6,000.00 13,000.00
Packaging 4,000.00 1,500.00 6,000.00 11,500.00
Purchases 2,000.00 750.00 3,000.00 5,750.00
Sales 4,000.00 750.00 6,000.00 10,750.00
Central administration 4,000.00 3,000.00 6,000.00 13,000.00
TOTAL 20,000.00 15,000.00 30,000.00 65,000.00
Table 5. CIF distributed by section
 3. Distribute the assigned costs of each section among the different activities
what they do.
The percentage distribution is carried out in each section with its different activities.

Considering the time spent on the production and fulfillment of each

activity in the production of the products we have the following basis of
distribution:
Section cut:
The activities of this section are:
Model development: This activity was assigned 18%
production load
Fabric dyeing: This activity was assigned 46% of the workload.
production
Fabric cutting: This activity was assigned a 36% workload.
production
Assembly section:
Sewing: This activity was assigned 46% of the workload.
production
Decorations: This activity was assigned 54% of the load.
production
Packaging section:
Packaging: This activity was assigned 22% of the load
production
Order shipping: This activity was assigned 78% of the workload.
of production
The other sections and allocation of the production load are shown in the following
summary table:
 TOTAL
SECTION ACTIVITY % COST
SECTION
Development of models 18.0% 100%
Cut Fabric dyeing 46.0%
Screenshot 36.0%
Sewing 46.0% 100%
Assembly
Decorations 54.0%
Packaging 22.0% 100%
Packaging
Order shipping 78.0%
Order to suppliers 30.0% 100%
Purchases Reception of the order 52.0%
Payment to suppliers 18.0%
Preparation of the catalog 52.0% 100%
Sales Order management 39.0%
Customer billing 9.0%
HR Management 25.0% 100%
Central Administration Accounting 63.0%
Finance 12.0%

Table No. 6. Percentage distribution base by activity in each section.

We distribute the costs by section of table No. 5, based on the assigned percentage in the
frame No. 6
 TOTAL
SECTION ACTIVITY COST
SECTION
Development of models 1,980.00 11,000.00
Cut Fabric dyeing 5,060.00
Screen cut 3,960.00
Sewing 5,980.00 13,000.00
Assembly
Ornaments 7,020.00
Packaging 2,530.00 11,500.00
Packaging
Order shipment 8,970.00
Order to suppliers 1,725.00 5,750.00
Purchases Order reception 2,990.00
Payment to suppliers 1,035.00
Preparation of the catalog 5,590.00 10,750.00
Sales Order Management 4,192.50
Customer billing 967.50
Human Resources Management 3,250.00 13,000.00
Central Administration Accounting 8,190.00
Finance 1,560.00
TOTAL GENERAL 65,000.00
Table No. 7. Costs distributed by activity

4. Next, the criteria for distributing the costs assigned to the

auxiliary activities, to be distributed among the main activities:
SECTION AUXILIARY ACTIVITY ASSIGNMENT CRITERION
In its entirety to the activity of
Purchases Payment to suppliers
Orders to suppliers
In its entirety to the activity of
Sales Client collection
Order Management
Human Resources Management
Number of people dedicated to each
activity.
Based on the total of
Central Administration Accounting
accounting movements
Depending on the volume of
Finance
income and expenses
Table No. 8. Criteria for the allocation of auxiliary activities
Information on the development of each of the auxiliary activities has been gathered,
Considering the assignment criteria, the following distribution is estimated:
ACTIVITIES Payment to Collection of Management of
Accounting Finance
MAIN suppliers clients HR
Model development 0.00% 0.00% 10.00% 7.00% 5.00%
Fabric dyeing 0.00% 0.00% 7.50% 6.00% 5.00%
Screen cut 0.00% 0.00% 10.00% 6.00% 5.00%
Sewing 0.00% 0.00% 20.00% 4.00% 5.00%
Decorations 0.00% 0.00% 10.00% 5.00% 5.00%
Packaging 0.00% 0.00% 7.50% 8.00% 15.00%
Order shipment 0.00% 0.00% 5.00% 22.00% 5.00%
Request to suppliers 100.00% 0.00% 5.00% 12.00% 20.00%
Order reception 0.00% 0.00% 5.00% 5.00% 5.00%
Preparation of the catalog 0.00% 0.00% 10.00% 5.00% 5.00%
Order management 0.00% 100.00% 10.00% 20.00% 25.00%
TOTAL 100% 100% 100% 100% 100%
Table No. 9. Percentage distribution of auxiliary activities
The following is the distribution in dollars:
Distribution of the HR management cost $3,250.00 to the main activities
Activity cost
Total cost
% of auxiliary
of Management
Main activity Distribution Distributed
of HR
{2} {3}=
{1}
(1*2)
Model development 3,250.00 10% 325.00
Fabric dyeing 3,250.00 8% 243.75
screenshot 3,250.00 10% 325.00
Sewed 3,250.00 20% 650.00
Decorations 3,250.00 10% 325.00
Packaging 3,250.00 8% 243.75
Order shipment 3,250.00 5% 162.50
Request to suppliers 3,250.00 5% 162.50
Order reception 3,250.00 5% 162.50
Preparation of the catalog 3,250.00 10% 325.00
Order Management 3,250.00 10% 325.00
Total 100% 3,250.00

AUXILIARY ACTIVITIES
ACTIVITIES Payment to Collection of Management of
AccountingFinance TOTAL
MAIN suppliers clients HR
Development of models - - 325.00 573.30 78.00 976.30
Fabric dyeing - - 243.75 491.40 78.00 813.15
Screenshot - - 325.00 491.40 78.00 894.40
Sewing - - 650.00 327.60 78.00 1,055.60
Ornaments - - 325.00 409.50 78.00 812.50
Packaging - - 243.75 655.20 234.00 1,132.95
Order shipment - - 162.50 1,801.80 78.00 2,042.30
Request to suppliers 1,035.00 - 162.50 982.80 312.00 2,492.30
Order reception - - 162.50 409.50 78.00 650.00
Preparation of the catalog - - 325.00 409.50 78.00 812.50
Order management - 967.50 325.00 1,638.00 390.00 3,320.50
TOTAL 1,035.00 967.50 3,250.00 8,190.00 1,560.00 15,002.50
Table No. 10. Cost of auxiliary activities assigned to main activities
Summarizing the data from table No. 7 and No. 10, according to each main activity
we have:

COSTS

Assigned from
ACTIVITIES Directly
activities TOTAL
MAIN assigned
auxiliaries
Development of models 1,980.00 976.30 2,956.30
Fabric dyeing 5,060.00 813.15 5,873.15
Screen cut 3,960.00 894.40 4,854.40
Sewing 5,980.00 1,055.60 7,035.60
Decorations 7,020.00 812.50 7,832.50
Packaging 2,530.00 1,132.95 3,662.95
Order shipping 8,970.00 2,042.30 11,012.30
Order to suppliers 1,725.00 2,492.30 4,217.30
Order Reception 2,990.00 650.00 3,640.00
Preparation of the catalog 5,590.00 812.50 6,402.50
Order management 4,192.50 3,320.50 7,513.00
TOTAL 49,997.50 15,002.50 65,000.00
Table No. 11. Total cost of main activities

5. Define the cost drivers for each of the main activities and once
established, gathering information in the company (estimated data) to know
how much each production line has needed:
ACTIVITIES
Drivers Shirt Pants TOTAL
MAIN
Model development Nº de nuevos modelos 2 4 6
Fabric dyeing number of fabric batches 2,000 1,000 3,000
Screen cut number of patterns 6 8 14
Sewing nº de patrones 6 8 14
Decorations number of variants 12 20 32
Packaging number of lots 1,500 800 2,300
Order shipment number of orders to customers 200 150 350
Order to suppliers number of orders to supplier 40 60 100
Order receipt number of orders to supplier 40 60 100
Preparation of the catalog number of catalogs 1 1 2
Order Management number of orders to customers 200 150 350
Table No. 12. Inductors by main activity
With the obtained information, we can calculate the cost of each inductor:

TOTAL COST NUMBER OF COST PER

ACTIVITIES ACTIVITY INDUCTORS INDUCTOR
MAIN PRINCIPAL FOR COST {3}
{1} {2} {1}÷{2}

Model development 2,956.30 6 492.72

Fabric dyeing 5,873.15 3,000 1.96
Screenshot 4,854.40 14 346.74
Sewing 7,035.60 14 502.54
Ornaments 7,832.50 32 244.77
Packaging 3,662.95 2,300 1.59
Order shipment 11,012.30 350 31.46
Order to suppliers 4,217.30 100 42.17
Order reception 3,640.00 100 36.40
Preparation of the catalog 6,402.50 2 3,201.25
Order management 7,513.00 350 21.47

Table No. 13. Unit cost per inductor

6. With all the information obtained from points 1 to 5, we can calculate the cost.
unit price of each product
 SHIRT PANTS
TOTAL TOTAL
COST QUANTITY COST QUANTITY
{3} {c}
DIRECT COSTS UNITARY USED UNITARY USED
{1}*{2} {a}*{b}
{1} {2} {a} {b}
$ $
Screen 5.00 40,000 200,000.00 5.00 60,000 300,000.00
Labor 24,000.00 3 72,000.00 24,000.00 2 48,000.00
Distribution of the CIF
of Principal Acts
Development of models 492.72 2 985.43 492.72 4 1,970.87
Fabric dyeing 1.96 2,000 3,915.43 1.96 1,000 1,957.72
Screen cut 346.74 6 2,080.46 346.74 8 2,773.94
Sewing 502.54 6 3,015.26 502.54 8 4,020.34
Decorations 244.77 12 2,937.19 244.77 20 4,895.31
Packaging 1.59 1,500 2,388.88 1.59 800 1,274.07
Shipping of the order 31.46 200 6,292.74 31.46 150 4,719.56
Request to suppliers 42.17 40 1,686.92 42.17 60 2,530.38
Order reception 36.40 40 1,456.00 36.40 60 2,184.00
Preparation of the catalog 3,201.25 1 3,201.25 3,201.25 1 3,201.25
Order management 21.47 200 4,293.14 21.47 150 3,219.86
TOTAL COSTS OF
PRODUCTION 304,252.70 380,747.30
PRODUCTION (units) 40,000.00 30,000.00
UNIT COST 7.61 12.69
Table No. 14. Determination of unit cost by ABC Costing System

7. Calculate the cost of goods sold for the income statement

SALES
Units P.V.
Total
sold Unit.
Shirts 30,000 20.00 600,000.00
Pants 15,000 30.00 450,000.00
Total ingreso 1,050,000.00

(-) COST OF SALES

Shirts 30,000 7.61 228,189.53
Pants 15,000 12.69 190,373.65
Total cost 418,563.18
Gross margin 631,436.82

Result 631,436.82

Table No. 15. Cost of sales per units sold