MA620 Advanced Management Fianacial Accounting
Questions:
Designing an Activity Based Costing system
To be able to extend contemporary Advanced Management Accounting ‘book knowledge’ to ‘real world’, in this assessment students design and develop an Activity Based Costing (ABC) system (hypothetical case) for an identified manufacturing firm currently operating in Australia.
Topics
1. Activity Based Costing in manufacturing firms
2. Activity Based Costing
Direct costs
Manufacturing overhead costs
Manufacturing overhead activities
Estimate the costs of the manufacturing overhead activities
Assign the costs of manufacturing overhead activities to products
Answers:
1. Activity based costing in manufacturing firms:
The organisations falling in the manufacturing industry have incorporated a group of inputs into the development of products or services. They factor in a broader group of expenses as well. At the time these organisations could apportion costs directly to the pertinent activity or item, there is considerable improvement in the cost management and budgeting of these organisations (Dong, Liu and Lin 2014). Such apportionment of cost serves as the basis of activity based costin
g. It has been observed that activity based costing has initiated in the manufacturing industry.
Activity based costing is a method of apportioning fixed overhead and administration costs to the activities that are cost-incurring events. Activity based costing apportions costs to those influential dynamics and activities having direct cause and effect association with a specific cost of overhead. The approach then apportions the costs of activity to such products or services for needing the activities. This costing method has initiated in the manufacturing industry as an effective measure of distributing the costs of overhead in contrast to the traditional method of using direct labour. With the shift from labour-intensive to automation and greater capital-intensive facilities and processes, the manufacturing organisations require a method for effective matching with the new operational environment (Frazier 2014). The manufacturers make use of this activity based costing at the time the overhead costs constitute of a considerable percentage of the total expenses. In addition, the manufacturers use this type of costing system at the time they manufacture product lines of different quantity and complexity or manufacture a vast array of goods needing different levels of service support (Kaplan and Anderson 2013).
2. Activity based costing at Optical Prescription Spectacle Makers (OPSM):
In this case, the organisation chosen is Optical Prescription Spectacle Makers (OPSM), which is the second biggest retailer of eyeglasses in Australia and New Zealand. The two products selected in this case include shop frames and shop sunglasses.
Direct costs:
|
Products compared |
Shop frames |
Shop sunglasses |
Total |
|
Units produced and sold [1] |
$ 900,000.00 |
$ 2,100,000.00 |
$3,000,000.00 |
|
Selling price per unit [2] |
$ 3.00 |
$ 2.00 |
$ 5.00 |
|
Direct labour cost per unit [3] |
$ 0.50 |
$ 0.50 |
$ 1.00 |
|
Direct materials cost per unit [4] |
$ 0.75 |
$ 0.50 |
$ 1.25 |
|
Sales revenues [1 x 2] |
$ 2,700,000.00 |
$ 4,200,000.00 |
$6,900,000.00 |
|
Direct costs: |
|
|
|
|
Direct labour costs [1 x 3] |
$ 450,000.00 |
$ 1,050,000.00 |
$1,500,000.00 |
|
Direct material costs [1 x 4] |
$ 675,000.00 |
$ 1,050,000.00 |
$1,725,000.00 |
|
Total direct costs |
$ 1,125,000.00 |
$ 2,100,000.00 |
$3,225,000.00 |
Manufacturing overhead costs, activities and estimation of the costs of the manufacturing overhead activities:
|
Activity Pool |
Cost Driver |
Unit Cost |
Total Activity for shop frames |
Total Manufacturing Cost |
|
Purchase orders |
n degree of purchase orders |
$ 1,800.00 |
75 |
$ 135,000.00 |
|
Machine set ups |
n degree of setups |
$ 1,500.00 |
150 |
$ 225,000.00 |
|
Product packaging |
n degree of product packages packed |
$ 0.20 |
900000 |
$ 180,000.00 |
|
Machine testing and calibration |
n degree of tests |
$ 100.00 |
1000 |
$ 100,000.00 |
|
Maintenance and cleaning |
n degree of batch runs |
$ 1,150.00 |
200 |
$ 230,000.00 |
|
Total |
|
|
|
$ 870,000.00 |
|
Activity Pool |
Cost Driver |
Unit Cost |
Total Activity for shop sunglasses |
Total Manufacturing Cost |
|
Purchase orders |
n degree of purchase orders |
$ 1,800.00 |
25 |
$ 45,000.00 |
|
Machine set ups |
n degree of setups |
$ 1,500.00 |
100 |
$ 150,000.00 |
|
Product packaging |
n degree of product packages packed |
$ 0.20 |
500000 |
$ 100,000.00 |
|
Machine testing and calibration |
n degree of tests |
$ 100.00 |
2000 |
$ 200,000.00 |
|
Maintenance and cleaning |
n degree of batch runs |
$ 1,150.00 |
50 |
$ 57,500.00 |
|
Total |
|
|
|
$ 552,500.00 |
Assigning the costs of manufacturing overhead activities to products:
|
Activity Pool |
Total Indirect Cost of Shop frames |
Cost per product unit of shop frames |
Total Indirect Cost of Shop sunglasses |
Cost per product unit of shop sunglasses |
Total Indirect Cost |
|
Purchase orders |
$ 135,000.00 |
0.15 |
$ 45,000.00 |
0.02 |
$ 180,000.00 |
|
Machine set ups |
$ 225,000.00 |
0.25 |
$ 150,000.00 |
0.07 |
$ 375,000.00 |
|
Product packaging |
$ 180,000.00 |
0.2 |
$ 100,000.00 |
0.05 |
$ 280,000.00 |
|
Machine testing and calibration |
$ 100,000.00 |
0.11 |
$ 200,000.00 |
0.09 |
$ 300,000.00 |
|
Maintenance and cleaning |
$ 230,000.00 |
0.26 |
$ 57,500.00 |
0.03 |
$ 287,500.00 |
|
Total |
$ 870,000.00 |
0.97 |
$ 552,500.00 |
$ 0.26 |
$ 1,422,500.00 |
References:
Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data. Transportation Research Part C: Emerging Technologies, 38, pp.44-55.
Frazier, W.E., 2014. Metal additive manufacturing: a review. Journal of Materials Engineering and Performance, 23(6), pp.1917-1928.
Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.
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