Essay Activity Based Costing

Essay Activity Based Costing-66
| No of production runs | 36 | 22 | 14 | 27000 | | | | | | 113000 | Calculate the total cost of production for Product X and Product Y based on c) Absorption costing based on direct labour hours d) Activity based costing Question 2 The Lomond Company operates an activity based costing system.The following costs and other data have been estimated for the coming period.

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Power costs | 50,000 | Material Handling Costs | 80,000 | Customer Services Costs | 200,000 | Production Control Costs | 120,000 | Canteen Costs | 30,000 | Maintenance Costs | 40,000 | The following cost drivers have been identified with each of the above costs.

Cost | Cost Driver | Power Costs | Machine hours | Material Handling Costs | Number of Stores requisitions | Customer Services Costs | Number of order requests | Production Control Costs | Number of batches | Canteen Costs | Number of luncheon vouchers | Maintenance Costs | Number of maintenance hours | The company produces two products called Morar and Nevis and other relevant data relating to the products are as follows: | Morar | Nevis | Production quantities (units) | 8,000 units | 10,000 units | Number of batches | 40 batches | 60 batches | Maintenance hours | 3,000 hours | 2,000 hours | Stores requisitions | 120 requisitions | 200 requisitions | Order requests | 850 orders | 1,150 orders | Number of luncheon vouchers | 4,500 vouchers | 7,500 vouchers | Material cost per kg (£) | £2 per kg | £2 per kg | Kgs per unit of product | 4 kgs per unit | 6 kgs per unit | Labour rate per hour (£) | £8 per hour | £7 per hour | Labour hours per unit of product | 1 hour per unit | 2 hour per unit | Machine hours per unit of product | 4 hours per unit | 8 hours per unit | Calculate the cost per unit for Morar and Nevis based.

ABC is method that lists and measures the cost of each activity that facilitates the production to present the merchandise and service to client.

( Sohal and Walter, 1998 ) The usage of Activity-Based Costing ( ABC ) in the West is really common as it provides more dependable information about the cost associated with bring forthing the merchandise.

The costs of all activities relating to a product would be added together to give the overhead element of the cost of production.

Because activity based costing shares out overheads using cost drivers compared with the traditional costing systems which use departments, then a greater number of drivers can be used, reflecting all the different activities taking place in the manufacturing process.

This leads to a fairer and more accurate way of charging overheads to the products.

The traditional methods ignore the detail of many of the activities that actually take place.

Activity based costing ( ABC ) is invariably replacing the traditional accounting system.

ABC introduced by Professor Kaplan and Cooper of Business School of University of Harvard.

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