Analysis Of ABC Costing System For A Company
Assigning Costs to Activity Centers
The following table shows the assignment the costs to the activity centres using the resource driver consumption patterns shown in Schedules 1 and 2:
{For new Editor.}
|
|
(Amounts in $) |
|
||||||
|
Cost category |
Wages |
Building costs |
Depreciation |
Consumables |
Energy |
Other |
Total |
|
|
New product development |
1,44,000.00 |
25,000.00 |
– |
992.06 |
– |
1,500.00 |
1,71,492.06 |
|
|
3.00 |
200.00 |
– |
10.00 |
– |
3.00 |
|||
|
Sales and dispatch |
5,76,000.00 |
62,500.00 |
– |
1,984.13 |
– |
6,000.00 |
6,46,484.13 |
|
|
12.00 |
500.00 |
– |
20.00 |
– |
12.00 |
|||
|
Inspecting |
96,000.00 |
62,500.00 |
– |
– |
– |
1,000.00 |
1,59,500.00 |
|
|
2.00 |
500.00 |
– |
– |
– |
2.00 |
|||
|
Pasteurizing |
14,88,000.00 |
1,25,000.00 |
5,00,000.00 |
18,849.21 |
74,573.86 |
15,500.00 |
22,21,923.07 |
|
|
31.00 |
1,000.00 |
4,000.00 |
190.00 |
2,50,000.00 |
31.00 |
|||
|
Culturing |
14,88,000.00 |
1,25,000.00 |
6,25,000.00 |
12,896.83 |
1,13,352.27 |
15,500.00 |
23,79,749.10 |
|
|
31.00 |
1,000.00 |
5,000.00 |
130.00 |
3,80,000.00 |
31.00 |
|||
|
Curing |
12,00,000.00 |
1,25,000.00 |
1,25,000.00 |
18,849.21 |
74,573.86 |
12,500.00 |
15,55,923.07 |
|
|
25.00 |
1,000.00 |
1,000.00 |
190.00 |
2,50,000.00 |
25.00 |
|||
|
Administration |
5,76,000.00 |
62,500.00 |
– |
5,952.38 |
– |
6,000.00 |
6,50,452.38 |
|
|
12.00 |
500.00 |
– |
60.00 |
– |
12.00 |
|||
|
Corporate management |
4,32,000.00 |
37,500.00 |
– |
2,976.19 |
– |
4,500.00 |
4,76,976.19 |
|
|
9.00 |
300.00 |
– |
30.00 |
– |
9.00 |
|||
|
Total |
60,00,000.00 |
6,25,000.00 |
12,50,000.00 |
62,500.00 |
2,62,500.00 |
62,500.00 |
82,62,500.00 |
|
|
125.00 |
5,000.00 |
10,000.00 |
630.00 |
8,80,000.00 |
125.00 |
The following table shows the calculation of the cost of each activity performed in the relevant (to your allocated case) activity cost centre, using the information provided in item 1 above and in Schedule 3:
{For new Editor.}
|
(Amounts in $) |
||||||||
|
Particulars |
Set up pasterurizer |
Load pasteurizer |
Operate pasteurizer |
Unload pasteurizer |
Clean pasteurizer |
Move to culturing room |
Total |
|
|
Wages |
6,00,000.00 |
6,00,000.00 |
24,00,000.00 |
12,00,000.00 |
6,00,000.00 |
6,00,000.00 |
60,00,000.00 |
|
|
Building costs |
31,250.00 |
31,250.00 |
4,37,500.00 |
31,250.00 |
31,250.00 |
62,500.00 |
6,25,000.00 |
|
|
Depreciation |
12,50,000.00 |
12,50,000.00 |
||||||
|
Consumables |
62,500.00 |
62,500.00 |
||||||
|
Energy |
2,62,500.00 |
2,62,500.00 |
||||||
|
Other |
6,250.00 |
6,250.00 |
25,000.00 |
12,500.00 |
6,250.00 |
6,250.00 |
62,500.00 |
|
|
Total |
6,37,500.00 |
6,37,500.00 |
44,37,500.00 |
12,43,750.00 |
6,37,500.00 |
6,68,750.00 |
|
|
A list of the activities performed and their annual costs is provided in Schedule 4 (some costs will need to be calculated as indicated in item 2 above). In addition the schedule provides an activity driver for each activity and the annual quantity of each activity driver. Calculate the cost per unit of activity driver for the activities listed:
The following table shows the desired calculations:
{For new Editor.}
|
|
(Amounts in $) |
|
||
|
Activity |
Cost |
Base |
Cost per activity |
|
|
Corporate management |
4,76,976.0000 |
|||
|
Process receivables |
2,60,181.0000 |
6,300.0000 |
41.2986 |
|
|
Process payables |
2,53,931.0000 |
3,100.0000 |
81.9132 |
|
|
Production planning |
1,36,340.0000 |
1,250.0000 |
109.0720 |
|
|
Reports to Health Dept |
15,950.0000 |
1,250.0000 |
12.7600 |
|
|
Process sales order |
4,00,390.0000 |
5,000.0000 |
80.0780 |
|
|
Dispatch sales order |
2,46,094.0000 |
3,100.0000 |
79.3852 |
|
|
New Product Development |
1,71,492.0000 |
#DIV/0! |
||
|
Inspect milk |
60,350.0000 |
1,250.0000 |
48.2800 |
|
|
Disposal of substandard milk |
15,950.0000 |
1,250.0000 |
12.7600 |
|
|
Move to pasteurizing room |
15,950.0000 |
1,250.0000 |
12.7600 |
|
|
Set up pasteurizer |
6,37,500.0000 |
1,250.0000 |
510.0000 |
|
|
Load pasteurizer |
6,37,500.0000 |
1,250.0000 |
510.0000 |
|
|
Operate pasteurizer |
42,37,500.0000 |
2,50,000.0000 |
16.9500 |
|
|
Unload pasteurizer |
12,43,750.0000 |
1,250.0000 |
995.0000 |
|
|
Clean pasteurizer |
6,37,500.0000 |
1,250.0000 |
510.0000 |
|
|
Move to culturing room |
6,68,750.0000 |
1,250.0000 |
535.0000 |
|
|
Set up scales |
81,425.0000 |
1,250.0000 |
65.1400 |
|
|
Weigh ingredients |
1,56,600.0000 |
1,250.0000 |
125.2800 |
|
|
Load culturing vats |
3,13,200.0000 |
1,250.0000 |
250.5600 |
|
|
Coagulation, Drain and Scalding |
15,77,999.0000 |
2,50,000.0000 |
6.3120 |
|
|
Drain and clean vats |
1,62,850.0000 |
1,250.0000 |
130.2800 |
|
|
Move to curing room |
87,675.0000 |
2,50,000.0000 |
0.3507 |
|
|
Pack and pressing |
3,34,375.0000 |
10,00,000.0000 |
0.3344 |
|
|
Setup curing room |
1,27,500.0000 |
20,000.0000 |
6.3750 |
|
|
Move to curing room |
66,875.0000 |
20,000.0000 |
3.3438 |
|
|
Cure products |
8,87,173.0000 |
20,000.0000 |
44.3587 |
|
|
Unload curing room |
66,875.0000 |
20,000.0000 |
3.3438 |
|
|
Inspect finished products |
35,350.0000 |
20,000.0000 |
1.7675 |
|
|
Disposal of substandard product |
15,950.0000 |
20,000.0000 |
0.7975 |
|
|
Move to truck |
73,125.0000 |
19,000.0000 |
3.8487 |
|
Based on the information calculated in item 3 above and in Schedules 5 and 6, prepare a bill of activities and determine the cost per unit for each of the two product items identified:
The following table shows the calculation of cost per unit:
{For new Editor.}
|
(Amounts in $) |
||
|
Cheddar |
Activity driver |
Cost |
|
Corporate management |
95,395.0000 |
95,395.0000 |
|
Process receivables |
600.0000 |
24,779.1429 |
|
Process payables |
300.0000 |
24,573.9677 |
|
Production planning |
100.0000 |
10,907.2000 |
|
Reports to Health Dept |
100.0000 |
1,276.0000 |
|
Process sales order |
630.0000 |
50,449.1400 |
|
Dispatch sales order |
500.0000 |
39,692.5806 |
|
New Product Development |
– |
– |
|
Inspect milk |
100.0000 |
4,828.0000 |
|
Disposal of substandard milk |
100.0000 |
1,276.0000 |
|
Move to pasteurizing room |
100.0000 |
1,276.0000 |
|
Set up pasteurizer |
100.0000 |
51,000.0000 |
|
Load pasteurizer |
100.0000 |
51,000.0000 |
|
Operate pasteurizer |
50,000.0000 |
8,47,500.0000 |
|
Unload pasteurizer |
100.0000 |
99,500.0000 |
|
Clean pasteurizer |
100.0000 |
51,000.0000 |
|
Move to culturing room |
100.0000 |
53,500.0000 |
|
Set up scales |
100.0000 |
6,514.0000 |
|
Weigh ingredients |
100.0000 |
12,528.0000 |
|
Load culturing vats |
100.0000 |
25,056.0000 |
|
Coagulation, Drain and Scalding |
50,000.0000 |
3,15,599.8000 |
|
Drain and clean vats |
100.0000 |
13,028.0000 |
|
Move to curing room |
50,000.0000 |
17,535.0000 |
|
Pack and pressing |
2,00,000.0000 |
66,875.0000 |
|
Setup curing room |
2,000.0000 |
12,750.0000 |
|
Move to curing room |
2,000.0000 |
6,687.5000 |
|
Cure products |
2,000.0000 |
88,717.3000 |
|
Unload curing room |
2,000.0000 |
6,687.5000 |
|
Inspect finished products |
– |
– |
|
Disposal of substandard product |
– |
– |
|
Move to truck |
2,000.0000 |
7,697.3684 |
|
Direct material |
6.0000 |
12,00,000.0000 |
|
Selling price |
14.0000 |
28,00,000.0000 |
|
Batch size |
2,000.0000 |
|
|
Annual volume |
2,00,000.0000 |
|
|
Cost per unit |
|
15.9381 |
|
(Amounts in $) |
||
|
Mascarpone |
Activity driver |
Cost |
|
Corporate management |
11,447 |
11,447.0000 |
|
Process receivables |
200 |
8,259.7143 |
|
Process payables |
100 |
8,191.3226 |
|
Production planning |
60 |
6,544.3200 |
|
Reports to Health Dept |
60 |
765.6000 |
|
Process sales order |
190 |
15,214.8200 |
|
Dispatch sales order |
100 |
7,938.5161 |
|
New Product Development |
56,592 |
56,592.0000 |
|
Inspect milk |
60 |
2,896.8000 |
|
Disposal of substandard milk |
60 |
765.6000 |
|
Move to pasteurizing room |
60 |
765.6000 |
|
Set up pasteurizer |
60 |
30,600.0000 |
|
Load pasteurizer |
60 |
30,600.0000 |
|
Operate pasteurizer |
12,000 |
2,03,400.0000 |
|
Unload pasteurizer |
60 |
59,700.0000 |
|
Clean pasteurizer |
60 |
30,600.0000 |
|
Move to culturing room |
60 |
32,100.0000 |
|
Set up scales |
60 |
3,908.4000 |
|
Weigh ingredients |
60 |
7,516.8000 |
|
Load culturing vats |
60 |
15,033.6000 |
|
Coagulation, Drain and Scalding |
12,000 |
75,743.9520 |
|
Drain and clean vats |
60 |
7,816.8000 |
|
Move to curing room |
12,000 |
4,208.4000 |
|
Pack and pressing |
25,000 |
8,359.3750 |
|
Setup curing room |
500 |
3,187.5000 |
|
Move to curing room |
500 |
1,671.8750 |
|
Cure products |
500 |
22,179.3250 |
|
Unload curing room |
500 |
1,671.8750 |
|
Inspect finished products |
500 |
883.7500 |
|
Disposal of substandard product |
500 |
398.7500 |
|
Move to truck |
480 |
1,847.3684 |
|
Direct material |
8 |
1,92,000.0000 |
|
Selling price |
18 |
|
|
Batch size |
400 |
|
|
Annual volume |
24,000 |
The difference in the costs would not be reflected in the system of conventional costing since this method does not take into account the different activities that are involved in the manufacture of the product.
Do you think that the existing costing system understates or overstates the cost of the two products identified in item 4 above? Explain your answers in detail with reference to your calculations:
The existing system of costing being used is the traditional method which overstates the cost per unit. The traditional method of costing takes into account the total amount of overhead and then the same is divided by the total number of the direct labour hours and then the number of direct labour hours are multiplied by the overhead price per unit. Whereas, the ABC method divides the overheads on the basis of the number of the activities that are used for the manufacture of the product. For example, the total amount of overhead is $8262500, if the traditional method would have been used, then this amount would have been divided by equally but under ABC, this is divided on the basis of the number of employees for each product.
Consider and describe the changes in cost structure that are likely to have occurred at the Company over the last 15 to 20 years, and speculate on their causes:
The cost under the traditional method would have been more and since the company always charges the price at cost + mark up, so the selling price would have been more. In the case given, the cot per unit comes out to be higher than the selling price that has been charged by the company.
How complete your analysis and prepare your report. Your report should identify if there are any deficiencies inherent in the existing costing system and if so explain (using the outcomes from items 1 to 7 above) how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain (again using the outcomes from items 1 to 7 above) why not:
All of the inherent deficiencies could be reduced if the company opts for the activity based costing method for the purposes of calculating the cost per unit.
Include in your discussion, what factors the management accountant should consider when deciding whether to use an Activity-based system that includes both manufacturing overhead and non-manufacturing costs. And furthermore outline the benefits, costs and limitations of activity-based costing:
There are many of the factors that determine the success of the implementation of the activity based costing. These factors include the support from the top management, use of the suitable software, ensuring that all of the affected employees understand and participate in the implementation of the costing method (Eprints, 2017).
For the purposes of allocating the costs, there are many of the concepts that do not guarantee the fact that the indirect costs are directly attributable to the various products and the services due to the reason of approximation and estimation (Word press, 2014). For the purposes of allocating the costs based on the different concepts of the ABC, all of the indirect costs have to be implemented but the same is very costly and troublesome. This is due to the fact that the selection of the drivers and the defining of the activities is very tough. Each particular stage of the method is equally important when it comes to the motivating of the adaptations of the methods and the opinion of the various external experts really matters and the size of the firm also matters (The journal of business, 2017).
The following are the benefits of employing this method:
- This method produces an accurate cost for each product since it takes into account the activities that are consumed by the product (Your article library, 2017).
- This method gives a detailed information about the behaviour of the cost since the method helps in the reduction of the costs and also identifying the activities that are of no value to the product.
- This method traces the activities for the costing object
- This method helps in making better decisions
- This method helps in tracing the costs to the different areas of the managerial responsibility
- It is more beneficial to the service industry
- This method provides the rates of the cost drivers and also provides information about the different transaction which proves to be useful for the management (Small business chron, 2017).
The following are the demerits of the method:
- The method is very costly when it comes to implementation and maintain
- This system produces the reports that cannot be compared with the profits and loss as is produced by the traditional system of costing
- Benchmarking cannot be done since the competitor companies are following the different method of costing, hence the costs calculated cannot be compared.
- The adaptability of this system of costing is not suitable for all of the companies since smaller companies do not have many resources and also do not have many activities but the size of the size of the various transactions is too low
- The data that is produced by this method of costing could be misinterpreted and could lead to making the wrong decisions
- This method of costing does not comply with the requirements that have been laid down by GAAP and hence, the company is duty bound to produce the reports using the traditional method of coting
- This method is used for the allocation of the base of the cost drivers and also the activities that are undertaken to manufacture the product. This further provides the accurate and the proper allocation of the costs to all of the products. There is also danger of the over and the under costing of the various products and there, is an assignment to the products (Bayt, 2017).
References:
Bayt.com. (2017). What are the limitations of ABC costing system?. [online] Available at: https://www.bayt.com/en/specialties/q/121869/what-are-the-limitations-of-abc-costing-system/ [Accessed 3 May 2017].
eprints.um.edu.my. (2017). Factors Influencing Activity-Based Costing Success: A Review. [online] Available at: https://eprints.um.edu.my/3118/1/ISBN_978.pdf [Accessed 3 May 2017].
quytrinh.files.wordpress.com. (2017). Factors influencing the implementation of Activity-Based Costing in Thailand: a case study of a Thai Telecommunications Company. [online] Available at: https://quytrinh.files.wordpress.com/2014/11/factors-influencing-the-implementation-of-activity-based-costing-in-thailand-16.pdf [Accessed 3 May 2017].
Smallbusiness.chron.com. (2017). The Disadvantages & Advantages of Activity-Based Costing. [online] Available at: https://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html [Accessed 3 May 2017].
Thejournalofbusiness.org. (2017). Activity based costing. [online] Available at: https://thejournalofbusiness.org/index.php/site/article/viewFile/259/255 [Accessed 3 May 2017].
YourArticleLibrary.com: The Next Generation Library. (2017). Advantages and Demerits of Activity Based Costing (ABC). [online] Available at: https://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-of-activity-based-costing-abc/52617/ [Accessed 3 May 2017].