Activity based costing example
Example 1: Machine Setup Costs
Scenario:
A company manufactures two products — Product A and Product B.
Total setup cost = ₱100,000
Total setups = 50
Product A requires 30 setups
Product B requires 20 setups
Step 1: Compute Cost per Setup
₱100,000 ÷ 50 = ₱2,000 per setup
Step 2: Allocate Setup Cost
Product A: 30 × ₱2,000 = ₱60,000
Product B: 20 × ₱2,000 = ₱40,000
Answer:
Product A = ₱60,000
Product B = ₱40,000
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Example 2: Material Handling Costs
Scenario:
Total material handling cost = ₱60,000
Activity driver = Number of material moves (120 total)
Product X: 90 moves
Product Y: 30 moves
Step 1: Cost per Material Move
₱60,000 ÷ 120 = ₱500 per move
Step 2: Allocate Cost
Product X: 90 × ₱500 = ₱45,000
Product Y: 30 × ₱500 = ₱15,000
Answer:
Product X = ₱45,000
Product Y = ₱15,000
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Example 3: Inspection Costs
Scenario:
Total inspection cost = ₱40,000
Activity driver = Number of inspections (100 total)
Product Alpha: 70 inspections
Product Beta: 30 inspections
Step 1: Cost per Inspection
₱40,000 ÷ 100 = ₱400 per inspection
Step 2: Allocate Cost
Product Alpha: 70 × ₱400 = ₱28,000
Product Beta: 30 × ₱400 = ₱12,000
Answer:
Product Alpha = ₱28,000
Product Beta = ₱12,000
Example 4: Order Processing Costs
Scenario:
Total order processing cost = ₱75,000
Activity driver = Number of customer orders (150 total)
Product Red: 100 orders
Product Blue: 50 orders
Step 1: Cost per Order
₱75,000 ÷ 150 = ₱500 per order
Step 2: Allocate Cost
Product Red: 100 × ₱500 = ₱50,000
Product Blue: 50 × ₱500 = ₱25,000
Answer:
Product Red = ₱50,000
Product Blue = ₱25,000
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Example 1: ABC for a Furniture Company
Company: Elegant Furnishings
Products: Chairs and Tables
Activity Total Cost Cost Driver Total Driver Units Chairs Tables
Machine Setup ₱60,000 Number of setups 30 20 10
Assembly ₱90,000 Labor hours 1,500 1,000 500
Step 1: Compute Cost Driver Rates
Setup rate = ₱60,000 ÷ 30 = ₱2,000 per setup
Assembly rate = ₱90,000 ÷ 1,500 = ₱60 per labor hour
Step 2: Assign Costs
Chairs: (20 × ₱2,000) + (1,000 × ₱60) = ₱40,000 + ₱60,000 = ₱100,000
Tables: (10 × ₱2,000) + (500 × ₱60) = ₱20,000 + ₱30,000 = ₱50,000
Answer:
Chairs = ₱100,000
Tables = ₱50,000
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Example 2: ABC for an Electronics Company
Company: TechPro Electronics
Products: Smartphones and Tablets
Activity Total Cost Cost Driver Total Driver Units Smartphones Tablets
Machine Maintenance ₱80,000 Machine hours 400 250 150
Packaging ₱40,000 Number of packages 1,000 700 300
Step 1: Compute Cost Driver Rates
Maintenance rate = ₱80,000 ÷ 400 = ₱200 per machine hour
Packaging rate = ₱40,000 ÷ 1,000 = ₱40 per package
Step 2: Assign Costs
Smartphones: (250 × ₱200) + (700 × ₱40) = ₱50,000 + ₱28,000 = ₱78,000
Tablets: (150 × ₱200) + (300 × ₱40) = ₱30,000 + ₱12,000 = ₱42,000
Answer:
Smartphones = ₱78,000
Tablets = ₱42,000
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Example 3: ABC for a Food Manufacturing Company
Company: FreshBite Foods
Products: Cookies and Cakes
Activity Total Cost Cost Driver Total Driver Units Cookies Cakes
Mixing ₱50,000 Machine hours 250 150 100
Quality Control ₱30,000 Inspections 60 40 20
Step 1: Compute Cost Driver Rates
Mixing rate = ₱50,000 ÷ 250 = ₱200 per machine hour
QC rate = ₱30,000 ÷ 60 = ₱500 per inspection
Step 2: Assign Costs
Cookies: (150 × ₱200) + (40 × ₱500) = ₱30,000 + ₱20,000 = ₱50,000
Cakes: (100 × ₱200) + (20 × ₱500) = ₱20,000 + ₱10,000 = ₱30,000
Answer:
Cookies = ₱50,000
Cakes = ₱30,000
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🚗 Example 4: ABC for an Auto Parts Manufacturer
Company: AutoGear Inc.
Products: Brake Pads and Clutch Plates
Activity Total Cost Cost Driver Total Driver Units Brake Pads Clutch Plates
Material Handling ₱70,000 Material moves 140 90 50
Inspection ₱30,000 Inspections 60 40 20
Step 1: Compute Cost Driver Rates
Material Handling rate = ₱70,000 ÷ 140 = ₱500 per move
Inspection rate = ₱30,000 ÷ 60 = ₱500 per inspection
Step 2: Assign Costs
Brake Pads: (90 × ₱500) + (40 × ₱500) = ₱45,000 + ₱20,000 = ₱65,000
Clutch Plates: (50 × ₱500) + (20 × ₱500) = ₱25,000 + ₱10,000 = ₱35,000
Answer:
Brake Pads = ₱65,000
Clutch Plates = ₱35,000
Breakeven analysis example
Example 1: Break-Even Point (in Units and Pesos)
Problem:
A company sells a product for ₱200 per unit. The variable cost per unit is ₱120, and total fixed
costs are ₱160,000.
Find:
1. The break-even point in units
2. The break-even point in pesos
Solution:
Contribution Margin per Unit =Selling Price−Variable Cost=200−120=₱ 80
1. Break-even point (in units):
Fixed Costs 160,000
Break-even Units= = =2,000 units
Contribution Margin per Unit 80
2. Break-even point (in pesos):
Break-even Sales=Break-even Units ×Selling Price=2,000 ×200=₱ 400,000
Answer:
Break-even point = 2,000 units
Break-even sales = ₱400,000
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Example 2: Target Profit Analysis
Problem:
A company sells a product for ₱500 each. Variable cost is ₱300 per unit, and total fixed costs are
₱100,000.
Find the number of units that must be sold to earn a target profit of ₱50,000.
Solution:
Contribution Margin per Unit =500−300=₱ 200
Fixed Costs+Target Profit 100,000+50,000 150,000
Required Units= = = =750 units
Contribution Margin per Unit 200 200
Answer:
The company must sell 750 units to earn ₱50,000 profit.
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Example 3: Margin of Safety and Profit Analysis
Problem:
XYZ Company sells 5,000 units at ₱100 each. Variable cost per unit is ₱60, and fixed costs are
₱120,000.
Find:
1. The break-even point in units
2. The margin of safety (in units and %)
3. The total profit
Solution:
Contribution Margin per Unit =100−60=₱ 40
1. Break-even point:
120,000
Break-even Units= =3,000 units
40
2. Margin of Safety:
MOS (units)=Actual Sales Units−Break-even Units=5,000−3,000=2,000 units
2,000
MOS (%)= × 100=40 %
5,000
3. Profit:
Profit =(Actual Sales Units ×CM per Unit )−Fixed Costs=(5,000 × 40)−120,000=200,000−120,000=₱ 80,000
Answer:
Break-even = 3,000 units
Margin of Safety = 2,000 units (40%)
Profit = ₱80,000
Absorption costing example
Example 1: Furniture Manufacturing Company (ABC Furniture Co.)
Scenario:
ABC Furniture Co. produces wooden chairs.
Direct materials: ₱400 per chair
Direct labor: ₱300 per chair
Variable manufacturing overhead: ₱100 per chair
Fixed manufacturing overhead: ₱200,000 per month
Production: 1,000 chairs per month
Computation:
Fixed manufacturing overhead per unit = ₱200,000 ÷ 1,000 = ₱200
Total cost per chair (Absorption Costing):
₱400 (materials) + ₱300 (labor) + ₱100 (variable overhead) + ₱200 (fixed overhead) = ₱1,000
per chair
Result:
The total unit cost under absorption costing is ₱1,000, which includes both variable and fixed
manufacturing costs.
Example 2: Food Processing Company (Delicious Bites Inc.)
Scenario:
Delicious Bites Inc. produces bottled fruit jams.
Direct materials: ₱25 per bottle
Direct labor: ₱15 per bottle
Variable factory overhead: ₱10 per bottle
Fixed factory overhead: ₱50,000 per month
Monthly production: 10,000 bottles
Computation:
Fixed manufacturing overhead per unit = ₱50,000 ÷ 10,000 = ₱5
Total cost per bottle (Absorption Costing):
₱25 (materials) + ₱15 (labor) + ₱10 (variable overhead) + ₱5 (fixed overhead) = ₱55 per bottle
Result:
Each bottle of jam has an absorption cost of ₱55, reflecting full production cost coverage.
Example 3: Electronics Company (TechPlus Manufacturing)
Scenario:
TechPlus Manufacturing produces smartphones.
Direct materials: ₱6,000 per unit
Direct labor: ₱2,000 per unit
Variable overhead: ₱1,000 per unit
Fixed manufacturing overhead: ₱3,000,000 per month
Production: 1,500 units per month
Computation:
Fixed manufacturing overhead per unit = ₱3,000,000 ÷ 1,500 = ₱2,000
Total cost per smartphone (Absorption Costing):
₱6,000 (materials) + ₱2,000 (labor) + ₱1,000 (variable overhead) + ₱2,000 (fixed overhead) =
₱11,000 per unit
Result:
Each smartphone has an absorption cost of ₱11,000, ensuring that both fixed and variable costs
are included in inventory valuation and cost of goods sold.