Activity Based Costing of ABC

Questions: A computer manufacturer produces three types of devices: mobile phones, tablets, and computers. For the production of these three devices you have the following information: Phone Tablet Computer Material cost per unit 90 140 315 Direct labor hours per unit 2 2.5 4 Budgeted units 1,500,000 900,000 1,200,000 Labor cost per hour 8 Overhead costs per annum Utilities 20,000,000 Rent 15,000,000 Audit and legal 5,000,000 Administrative staff 40,000,000 Total 80,000,000 ABC analysis suggested that overhead costs are distributed to the three products according to the table below: Overheads Phone Tablet Computer Utilities 8,000,000 5,000,000 7,000,000 Rent 8,250,000 2,250,000 4,500,000 Audit and legal 2,900,000 1,250,000 850,000 Administrative staff 23,200,000 6,000,000 10,800,000 For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be: Phone Tablet Computer Full costing price 170.69 233.87 435.67 1. Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours. 2. Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system. 3. Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company. Answers: 1.The following is the required solution: Budgeted units 1500000 900000 1200000 (Amounts in ) Particulars Phone Tablet Computer Direct material 1350,00,000.00 1260,00,000.00 3780,00,000.00 Direct labour 240,00,000.00 180,00,000.00 384,00,000.00 Overheads 238,80,597.01 179,10,447.76 382,08,955.22 800,00,000.00 in 30,00,000.00 22,50,000.00 48,00,000.00 100,50,000.00 Total cost 1828,80,597.01 1619,10,447.76 4546,08,955.22 divided by the number of budgeted units 15,00,000.00 9,00,000.00 12,00,000.00 Cost per unit 121.92 179.90 378.84 Price per unit 170.69 233.87 435.67 Profit 48.77 53.97 56.83 Profit in % 0.29 0.23 0.13 2.The following is the required solution: (Amounts in ) Budgeted units 15,00,000.00 9,00,000.00 12,00,000.00 Particulars Phone Tablet Computer Direct material 1350,00,000.00 1260,00,000.00 3780,00,000.00 Direct labour 240,00,000.00 180,00,000.00 384,00,000.00 Utilities 80,00,000.00 50,00,000.00 70,00,000.00 Rent 82,50,000.00 22,50,000.00 45,00,000.00 Audit and legal 29,00,000.00 12,50,000.00 8,50,000.00 Administrative staff 232,00,000.00 60,00,000.00 108,00,000.00 Total cost 2013,50,000.00 1585,00,000.00 4395,50,000.00 divided by the number of budgeted units 15,00,000.00 9,00,000.00 12,00,000.00 Cost per unit 134.23 176.11 366.29 Profit % 0.29 0.23 0.13 Price per unit 172.59 216.75 414.07 3.Activity based costing method is the method in which the cost to the various activities are allocated on the basis of the activity drivers in each of the product. This is the most logical method of allocating the cost since this is the way in which the cost will be allocated on the basis of the amount of the activities that are used in the business. (Accounting coach, 2015) The companies must go for the costing method that requires them to implement the ABC in the 5 step product costing sequence. In this, the direct costs that are associated with the cost of the object are identified. For a given object of the cost, the company attempts to identify all the costs that are currently being treated as the overhead cost and is capable of being traced directly to the product. The costs must be removed from the pool of the overheads and directly be traced to the product. This way the costs are started to be assigned to the individual products and jobs. (Classes.bus.oregonstate.edu, 2015) The following are the main advantages of the ABC due to which the company must go for it: The method takes into account the individual activities that are based upon the use of the resources The method enables the accurate costing of all the activities that are obtained throughout the organization With the help of this method, it is easier to identify the low and the high costs and the causes of the each. It serves as a valuable tool for both the business and for the improvement of the processes It helps in the planning of the future. (Managers-net.com, 2014) The second method of costing strategy seems logical since, the prices have been determine keeping in mind the ABC costing method. References: Managers-net.com, (2014). Activity Based Costing (ABC). Retrieved 19 October 2014, from https://www.managers-net.com/activityBC.html AccountingCoach.com, (2015). Activity Based Costing | Explanation | Accounting Coach. Retrieved 31 January 2015, from https://www.accountingcoach.com/activity-based-costing/explanation Classes.bus.oregonstate.edu, (2015). CHAPTER 11: ACTIVITY-BASED COSTING. Retrieved 31 January 2015, from https://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%2011.htm