Essay Activity Based Costing

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ABC delivers more specific information than traditional accounting system because it identifies the relationship between the cost driver and the activities associated with the production of that merchandise.

It helps to detect those activities those are non-efficient and does non add value to the public presentation of the activity ; therefore it helps the organisation to work the chance to cut down cost and maximise net income.

The acceptance rate of ABC is about 20 % in the larger companies ( Pike and Tayles ) .

ABC is non merely successful in the field of industrial fabrication system but besides it is successful in the field of wellness sector, public utilities, sweeping and retail organisation.

Introductory Exercise Young plc manufactures two products, Simple and Complex, using the same equipment and similar processes.

| Costs and other relevant information associated with these products for the upcoming budget period are detailed below: | | | | | Product | Product | | | | | | | | Simple | Complex | Total | | | Sales & Production (units) | | | | 4,000 | 2,000 | 6,000 | | | Direct Labour (hours) per unit | | | | 3 | 2 | | | | Production runs in the period | | | | 25 | 55 | 80 | | | Material Requisitions | | | | 20 | 35 | 55 | | | kg per unit of product | | | | 2 | 4 | | | | Direct labour rate per hour | | | | £8 | £8 | | | | Material Cost per kg | | | | £3 | £3 | | | | The total budgeted indirect production costs are £240,000 | | | | The business has started to use Activity Based Costing and has identified 2 basic activities | | which take place - materials handling and production set-ups.In add-on to its application in a broad assortment of commercial fabrication concern it has besides been adopted by public public-service corporations, by sweeping and retail administrations.The acceptance rate in the Far East is non so mention worthy because of complexness in implementing the system ; it deals with tonss of proficient issues.Marketing Costs | 72,000 | Material Processing Costs | 25,600 | After Sales & Repairs | 18,100 | Production Control Costs | 95,000 | Maintenance Costs | 28,000 | Power costs | 136,000 | The company produces 2 products called Ace and Whisk and other relevant data relating to the products are as follows: | Ace | Whisk | Production quantities (units) | 7,500 units | 12,500 units | Number of batches | 10 batches | 20 batches | Maintenance hours | 1,820 hours | 2,310 hours | Stores requisitions | 25 requisitions | 30 requisitions | Customer orders | 650 orders | 750 orders | Number of after sales requests | 130 | 200 | Material cost per kg (£) | £3.50 per kg | £3.50 per kg | Kgs per unit of product | 7 kgs per unit | 4 kgs per unit | Labour rate per hour (£) | £10.50 per hour | £11.00 per hour | Labour hours per unit of product | 3 hour per unit | 6 hour per unit | Machine hours per unit of product | 5 hours per unit | 7 hours per unit | Calculate the cost per unit for Ace and Whisk based.a) On the absorption based costing system based on labour hours b) On the activity based costing system c) Prepare a report for your Manager accurately describing activity based costing, giving justification for cost drivers chosen and advising the Managing Director of the advantages of moving to such a method.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.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.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.

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