Activity-Based Costing - Assignment Example

PART 1. predetermined manufacturing overhead rate This is unit overhead absorbed to the product on the basis of the unit of base. The method is employed to apply manufacturing overhead to the product or job orders as well normally worked out at the start of the every period (Baker 1998). The approach is derived as follows Predetermined manufacturing overhead rate= {Budgeted overhead/unit of base} 2. Advantages and disadvantages of using the cost of each print as a man­ufacturing overhead cost driver The advantage of the approach is that cost will be more precise since the cost is tailored towards a specific product. The disadvantage is that it place too mu8ch emphasize on the anticipation of how many every single product will be sold. 3. Predetermined manufacturing overhead rate for Printex based on print cost. Price per unit No of unit Total cost Unframed 12 80,000 960000 steel framed no matting 16 15000 240000 Wood framed with matting 20 7000 140000 Total printing cost 1340,000 Pre-determined overhead absorption rate= {manufacturing overhead/total printing cost} {375,200 /1340, 000=0.28 per unit 4. Expected product unit cost Unframed steel framed no matting Wood framed with matting Unit price 12 16 20 Absorption rate 0.28 0.28 0.28 unit cost 12.28 16.28 20.28 5. (A) How much of the total overhead cost is expected to be allocated to: unframed prints = 9960,000*0.28)=$268000 steel framed prints=(240,000*0.28)= $67200 wood framed prints=(140,000*0.28)=$39200 B. percentage of the total overhead cost is expected to be allocated to unframed prints The percentage of the entire overhead cost anticipated to be allotted to unframed print, steal print without matting and wood print with matting is $71.64%. (268,000/374400) 6 Do you think the amount of overhead allocated to the three product categories is reasonable? No I don’t think is the amount of overhead apportioned to the three product is realistic since, there is too much overhead allotted to unframed prints with very small overhead allotted to framed prints. PART B 1. Activity based costing (ABC) costing is a form of absorption costing. The ABC differs from traditional costing since it assumes a diverse method to the allocation and absorption of production overhead cost. ABC entails the classification of cost drivers that cause the cost of company key activities. Support overheads are accounted for in the products based on their usage (Budgeting 2009). The cost that change with production level in the short term, the cost driver is related to their cost such as the labor and machines hours. Those overheads that change with activities and not the volume of product are traced to the product employing transaction-based cost. 2. The table that shows the calculation of the activity cost per unit of activity driver for each of the four activities. Activities Est. overhead cost driver OAR Absorption rate picking prints 30600 No. of prints 30600/102000 0.3 inventory selection 91700 NO of component 91700/10200 0.89 web-site maintenance 129000 No. of prints 129000/102000 1.26 framing and matting 123900 No. of prints 123900/102000 1.2 3. Table that shows the calculation of the expected product unit cost for the three product categories using ABC Pre-determined overhead absorption rate= {manufacturing overhead/total printing cost} Absorption rate Unframed steel framed no matting Wood framed with matting 12 16 20 picking prints 0.3 3.6 4.8 6 inventory selection 0.89 10.68 14.24 17.8 web-site maintenance 1.26 15.2 10.16 25.2 framing and matting 1.2 14.4 3.2 2.4 product unit cost 43.88 32.4 51.4 4. The product unit costs calculated using ABC differ from those calculated using the traditional volume-based approach to allocating overhead costs ABC entails the classification of cost drivers that cause the cost of company key activities. Support overheads are accounted for in the products based on their usage. The cost that change with production level in the short term, the cost driver is related to their cost such as the labor and machines hours. Those overheads that change with activities and not the volume of product is traced to the product employing transaction-based cost driver like the production runs and number of orders received. The traditional costing system assumes that entire product uses the entire resource in percentage of their production size; tend to apportion too great percentage of overheads to huge volume product as well as too small percentage of overheads to low volume of product. the Activity based costing system provide important information that activities that drive the overheads cost while the traditional approach of costing and marginal; rarely do provide (Janet M. Kelly n.d.). ABC as a result provides information that might be important to long-term cost control as well as long term product assortment and pricing. the ABC method can as well as provide the basis for management information system to control as well as administer the overhead cost hence with ABC, overheads are charged to product on the basis of activities which are considered to provide product. Every product must be assigned with a fair portion of overhead cost that account for the activities which leads to revenue realization. 5. The implications of using operating capacity as the cost driver rather than the expected units sold when allocating fixed overhead costs. In employing the operating cast as the basis to sustain the fixed cost and ensure that it is consistent. Where the fixed overhead is allotted using the expected units sold, change from time to time. The cost per unit will change and consequently it is important to employ a unit of basis which rarely changes unlike the operating capacity so as to ensure that the fixed cost per unit is steady (Lewis 1995). The management may control the cost on the basis of standard in employing operating capacity such as the cost driver to allocate fixed overhead. An activity cost at standard is what is relevant for appraisal, resource sharing as well as assessment. By allotting fixed overhead cost using the operating capacity as the base will provide the company with an overview of the estimates, the cost of every item at capacity. 6. Overhead to each of the three product categories Absorption rate Unframed steel framed no matting Wood framed with matting 12 16 20 picking prints 0.3 3.6 4.8 6 inventory selection 0.89 10.68 14.24 17.8 web-site maintenance 1.26 15.2 10.16 25.2 framing and matting 1.2 14.4 3.2 2.4 43.88 32.4 51.4 Overheads Units sold 80000 15000 7000 picking prints 0.3 24000 4500 2100 inventory selection 0.89 71200 13350 6230 web-site maintenance 1.26 96000 18900 8820 framing and matting 1.2 96000 18000 8400 Total Applied overhead 287200 54750 25550 b. Calculate the amount of under or over applied overhead for 2012 Actual overhead $375,200 Budgeted overhead= {287200+54750+25550} = $367500 Under-absorbed overhead= {375200-367500} =$7,700 There is an under absorbed overheads of $7,700 which is majorly caused by poor estimation as well as other business factors that might affect the business situation and external factor. Reference list Baker, JJ 1998, Activity-based Costing and Activity-based Management for Health Care, Jones & Bartlett Learning, New York. Budgeting, ABMOP-B 2009, Marc Robinson, ‎Mr. Duncan Last, New york. Gerald Miller, ‎BH‎R 2001, Performance Based Budgeting, London. Janet M. Kelly, ‎CR, Performance Budgeting for State and Local Government. Lewis, RJ 1995, Activity-based Models for Cost Management Systems, Greenwood Publishing Group, London. Read More