Costing Statements using ABC (Cambridge International A-Level Accounting)
Spec point — how to use ABC to: – identify the appropriate cost driver – apportion and allocate overheads – calculate the total cost and selling price of a unit
Costing statements using ABC
Which cost driver to use?
- This depends of how the overheads are organised together in their cost pools
- The cost driver should be related to the output
- Ask the question what is the main activity that is driving the cost!
How do I use ABC costing?
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STEP 1 Identify the cost drivers
- Identify the cost pool
- Identify the cost drivers
- Here is a table that might help:
| Cost pool ($) | Cost driver |
|---|---|
| Machine set up | Number of set up's |
| Quality inspection | Number of quality inspections |
| Transfer cost | Number of transfers |
| Procurement / orders | Number of orders |
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STEP 2 Calculate the cost driver rate
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Work out the cost driver rate by using the following formula:
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For example:
- Let's say the cost pool is machine set up with an overall cost of $50 000
- The number of set up's needed for the machine is 250 (this is the cost driver)
- Therefore the cost driver rate will be :\frac{\ 50 000}{250 } = $ 200 \text{per} \text{machine} \text{set} \text{up}$
- So each time the machine is set up for production, it will cost $200
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STEP 3 Calculate the cost per batch or unit
- Each production run is called a batch
- Use all the information to calculate the cost per batch
- This can then be converted to per unit, depending on how many units are produced per batch.
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STEP 4 Calculate the selling price
- Use the **cost per unit **
- Add the** mark-up %**
Worked Example T and C limited manufacture wooden tables and chairs. The tables are made in batches of 1 000 units. The chairs are made in batches of 200 units .
The monthly production is 8 000 tables and 2 400 chairs.
Here is some more information about tables and chairs
Tables Chairs Direct material per unit $40 $15 Direct labour per unit $12 $17 Indirect production costs each month are:
- Machine set up cost - $70 000
Each batch needs a machine set up
The business operates a 20% mark-up
Required - To calculate the cost per unit and selling price per unit for each table and chair using ABC costing.
Answer:
Find the number of set up's needed per month:
Tables = = 8 set up's
Chairs = = 12 set up's
Total number of set up's need = 8 + 12 = 20
Work out the machine set up cost per table
- Find the proportion of the machine set up cost that is for tables
\frac{\ 70 000}{20} \times 8 = $ 28 000$
- Find the set up cost per unit per table
\frac{\ 28 000}{8 000 units} = $ 3.50 \text{machine} \text{set} \text{up} \text{cost} \text{per} \text{unit}$
Work out the machine set up cost per chair
- Find the proportion of the machine set up cost that is for chairs
\frac{\ 70 000}{20} \times 12 = $ 42 000$
- Find the cost drive rate
\frac{\ 42 000}{2 400 units} = $ 17.50 \text{machine} \text{set} \text{up} \text{cost} \text{per} \text{unit}$
Tables
$Chairs
$Direct material per unit Final answer: 40 Final answer: 15 Direct labour per unit Final answer: 12 Final answer: 17 Machine set up Final answer: 3.50 Final answer: 17.50 Total cost per unit Final answer: 55.50 Final answer: 49.50 Mark-up 20% × 55.50 = 11.10 20% × 49.50 = 9.90 Selling price per unit Final answer: 66.60 Final answer: 59.40
Exam Hint Remember to include all the cost when calculating the cost per unit. This includes direct and indirect costs.
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