Activity Based Costing Example/Problem:
Ferris
Corporation makes a single product - a fire
resistant commercial filing cabinet - that
it sells to office furniture distributors.
The company has a simple ABC system that it
uses for internal decision making. The
company has two overhead departments whose
costs are listed below:
|
Manufacturing overhead |
$5,00,000 |
|
Selling and administrative overhead |
$300,000 |
| |
|
|
Total
overhead costs |
$8,00,000 |
The
company's activity based costing system has
the following activity cost pools and
activity measures:
|
Activity Cost Pool |
Activity Measures |
|
Assembling units |
Number
of units |
|
Processing orders |
Number
of orders |
|
Supporting customers |
Number
of customers |
|
Other |
Not
applicable |
Costs
assigned to the "other" activity cost pool
have no activity measure; they consist of
the costs of unused capacity and
organization-sustaining costs - neither of
which are assigned to products, orders or
customers.
Ferris
Corporation distributes the costs of
manufacturing overhead and of selling and
administrative overhead to the activity cost
pools based on employee interviews, the
results of which are reported below:
|
Distribution of Resource Consumption
Across Activity Cost Pools
|
| |
Assembling Units |
Processing Orders |
Supporting Customers |
Other |
Total |
|
Manufacturing overhead |
50% |
35% |
5% |
10% |
100% |
|
Selling and administrative overhead |
10% |
45% |
25% |
20% |
100% |
|
Total
activity |
1,000
units |
250
orders |
100
customers |
-- |
-- |
Required:
-
Perform the
first stage allocation of overhead
costs to the
activity cost pools.
-
Compute activity rates for the
activity cost pools.
-
OfficeMart is one of the Ferris
Corporation's customers. Last year
OfficeMart ordered filing cabinet four
different times. OfficeMart ordered a
total of 80 cabinets during the year.
Construct a table showing the overhead
costs of these 80 units and four orders.
Solution:
1. The
first stage allocation of costs to the
activity cost pools appears below:
|
Activity Cost Pools |
|
| |
Assembling Units |
Processing Orders |
Supporting Customers |
Other |
Total |
|
Manufacturing overhead |
$250,000 |
$175,000 |
$25,000 |
$50,000 |
$500,000 |
|
Selling and administrative overhead |
30,000 |
135,000 |
75,000 |
60,000 |
300,000 |
| |
|
|
|
|
|
|
Total
activity |
$280,000 |
$310,000 |
$100,000 |
$110,000 |
$800,000 |
| |
|
2. The
activity rates for the
activity cost pools are:
|
Activity Cost Pools |
Total Cost |
Total Activity |
Activity Rate |
|
Assembling units |
$280,000 |
1,000
units |
$280
per unit |
|
Processing orders |
$310,000 |
250
units |
$1,240
per order |
|
Supporting customers |
$100,000 |
100
customers |
$1,000
per customer |
3. The
overhead cost for the four orders of a total
of 80 filing cabinets would be computed as
follows:
|
Activity Cost Pools |
Total Cost |
Total Activity |
Activity Rate |
|
Assembling units |
$280
per unit |
80
units |
$22,400 |
|
Processing orders |
$1,240
per order |
4
units |
$4,960 |
|
Supporting customers |
$1000
per customer |
Not
applicable |
|
4. The
product and customer margin can be computed
as follows:
|
Filing
Cabinet Product Margin: |
|
|
|
Sales
($595 per unit
×
80 units) |
|
$47,600 |
|
Cost: |
|
|
|
Direct materials ($180 per unit
× 80 units) |
$14,400 |
|
|
Direct materials ($50 per unit
× 80 units) |
4,000 |
|
|
Volume related overhead (above) |
22,400 |
|
|
Order related overhead (above) |
4,960 |
45,760 |
| |
|
|
| |
|
$1,840 |
| |
|
========== |
|
Customer profitability Analysis -
OfficeMart |
|
|
|
Product margin (above) |
$1,840 |
|
|
Less:
Customer support overhead (above) |
1,000 |
|
| |
|
|
| |
$840 |
|
| |
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|
| |
|
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Relevant Articles:
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