ABC Costing

Problem 1

Manufacturing overhead 500,000

Selling & Administrative overhead 300,000
Total Overhead cost 800,000

Activity Cost Pool Activity Measure

Assembling units Number of units
Processing orders Number of orders
Supporting customers Number of customers
Other Not applicable

Assembling units Processing Supporting customers Other Total

orders
Manufacturing 50% 35% 5% 10% 100%
overhead
Selling & 10% 45% 25% 20% 100%
Administrative
overhead
Total activity 1,000 units 250 orders 100 customers

Office Mart is one of Ferris Corporation’s customers. Last year, Office Mart ordered filling cabinets 4
different times. Office Mart ordered a total of 80 filing cabinets during the year. Show the overhead cost
attributable to Office Mart.

The selling price of a filing cabinet is $595. The cost of direct materials is $180 per filing cabinet and
direct labor is $50 per filing cabinet. What is the customer margin of Office Mart?

Solution:

Step 1: Allocation of costs to the activity cost pools

Assembling units Processing Supporting Other Total

orders customers
Manufacturing 250,000 175000 25,000 50,000 500,000
overhead
Selling & 30,000 135,000 75,000 60,000 300,000
Administrative
overhead
Total cost $280,000 $310,000 $100,000 $110,000 $800,000
Step 2: Activity rate calculation

Activity Cost Pool Total Cost (a) Total Activity (b) Activity Rate (a/b)
Assembling units $280,000 1,000 units $280 per unit
Processing orders $310,000 250 orders $1240 per order
Supporting customers $100,000 100 customers $1000 per customers

Step 3: The overhead cost for Office Mart

Activity Cost Pool Activity rate (a) Total Activity (b) ABC Cost (a*b)
Assembling units $280 per unit 80 units $22400
Processing orders $1240 per order 4 orders $4960
Supporting customers $1000 per customer 1 customer $1000

Step 4: Customer Margin

Sales $47600 (595*80)

Cost
Direct Material 14400 (180*80)
Direct Labor 4000 (50*80)
Assembling unit cost 22400
Processing orders cost 4960
Supporting customers cost 1000 $46760
Customer Margin $840

Problem 2:

• Estimated Manufacturing Overhead 9,00,000

• Estimated Production of Deluxe Model is 5,000 Units which requires 2 DLH/unit.

• Estimated Production of Regular Mode is 40,000 Units which requires 1 DLH/unit.

• Deluxe: DM=40, DL=14

• Regular: DM=25, DL=7

Calculate the Production Cost in Traditional Costing.

Traditional Costing

Manufacturing Overhead Rate= [900000/ (5000*2) + (40,000*1)]

= $18 per unit

Production Cost of Deluxe Model:

Direct Material 40
Direct Labor 14
Manufacturing Overhead 36 (18*2)
Production Cost $90 per unit

Production Cost of Regular Model:

Direct Material 25
Direct Labor 7
Manufacturing Overhead 18 (18*1)
Production Cost $50 per unit

Activity Rate Calculation

Activity Cost Pool Total Cost (a) Total Activity (b) Activity Rate (a/b)
Purchasing $204000 600 orders $340 per order
Processing $182000 35000 hours $5.2 per hour
Scrap/Rework $379000 2000 orders $189.5 per order
Shipping $135000 900 shipments $150 per shipment

The Overhead & Product cost for Deluxe

Activity Cost Pool Activity rate Activity-Deluxe ABC Cost- Product Cost
(a) (b) (a*b)
Purchasing $340 200 orders $68000 DM 40
Processing $5.2 20,000 hours $104000 DL 14
Scrap/Rework $189.5 1000 orders $189500
 Shipping $150 250 shipments $37500 MO 79.8 (399000/5000)

Total $399000 133.8

The Overhead & Product cost for Regular

Activity Cost Pool Activity rate Activity-Deluxe ABC Cost- Product Cost
(a) (b) (a*b)
Purchasing $340 400 orders $136000 DM 25
Processing $5.2 15,000 hours $78000 DL 7
Scrap/Rework $189.5 1000 orders $189500
Shipping $150 650 shipments $97500 MO 12.53 (501000/40000)

Total $501000 44.53

Income Statement (Deluxe)

Sales $1000000 (200*5000)

Cost
Direct Material 200000 (5000*40)
Direct Labor 70000 (5000*14)
Manufacturing Overhead 399000 (5000*79.8) $669000
Margin $331000

Income Statement (Regular)

Sales $6000000 (40000*150)

Cost
Direct Material 1000000 (40000*25)
Direct Labor 280000 (40000*7)
Manufacturing Overhead 501000 (40000*12.53) $1781000
Margin $4219000

Problem 3
Estimated Manufacturing Overhead 1800000

Traditional Costing

Manufacturing Overhead Rate= [18,00,000/ (5000*1.8) + (30,000*0.9)]

= 50 per unit

Product Cost of X200

DM 72
DL 10
MO 90 (50*1.8)
Total 172

Product Cost of X99

DM 50
DL 10
MO 45 (50*0.9)
Total 105

ABC Costing

Activity Rate Calculation

Activity MO (a) Total Activity (b) Activity Rate (a/b)
Machine setups 360000 150 2400
Processing 180000 1200 150
Gen factory 1260000 36000 35

MO Cost for X200

Activity Activity Rate Activity (x200) MO cost Product Cost
Machine setups 2400 50 120000 DM 72
Processing 150 12000 1800000 DL 10
Gen factory 35 9000 315000 MO (2235000/5000) 447
2235000 529
 MO cost for x99
Activity Activity Rate Activity (x99) MO cost Product Cost
Machine setups 2400 100 240000 DM 50
Processing 150 0 0 DL 10
Gen factory 35 27000 945000 MO (1185000/30000) 39.5
1185000 99.5

Income Statement (x200)

Revenue (200*5000) 1000000
DM (5000*72) 360000
DL 50000
MO (5000*447) 2235000
Margin $ (1,645,000.00)

Income Statement (x99)

Revenue (150*30000) 4500000
DM 1500000
DL 300000
MO (30000*39.5) 1185000
Margin $ 1,515,000.00

High Low Method

Problem 2-20

Month Machine hours Total Overhead

April 50000 200,000
May 40000 180,000
June 70000 220,000
July 80000 250,000

For 40,000 units

Utilities (variable) 40,000

Supervisory Salaries (Fixed) 30,000
Maintenance (Mixed) 110,000
Total Overhead Cost 180,000

Q: Find total variable cost, mixed cost, mixed cost equation, total overhead cost equation for the month
of July.

Solution:

For 40,000 units,

Per unit Variable Cost= (40,000/40000) = 1 per unit

For 80,000 units,

Total Variable Cost= (80,000*1) = $80,000

Mixed Cost= Total Overhead Cost – (Variable cost + Fixed Cost)

= 250,000 – (80,000 + 30,000)

= $140,000

ii) Mixed Cost Equation

Activity Maintenance Cost

July 80000 (high) 140,000
May 40000 (low) 110,000
Change 40,000 30,000

Maintenance Variable cost per unit= 30,000 / 40,000 = 0.75 per unit

Maintenance Fixed Cost = 140,000 – (0.75*80000)

= $80,000

Y= mx + C

Y= 0.75x + 80000 [Mixed Cost Equation]

iii) Overhead Cost Equation

Variable cost per unit Fixed Cost

Utilities 1
Supervisor Salary 30,000
Maintenance Cost 0.75 80,000
Total 1.75 110,000

Y= 1.75x + 110000 [ Total Overhead Cost Equation]