Question

Give example related to ABC costing and find the overhead allocation rate for this example using ABC Costing? Discuss the advantages of using ABC Costing?

Answer 1

Example of ABC Costing:

Manufacturing OH costs assigned to setups	200,000
No. of setups	400
Manufacturing OH cost per setup	500
	2,000,000
Total manufacturing OH costs	200,000
Less: Cost traced to machin esetups	1,800,000
Manufacturing OH allocated on machine hours	100,000
Machine hours	18
Manufacturing OH cost per MH
Manufacturing OH cost allocations
500 setup cost per batch + $18 per M/H
Manufacturing OH for setting up machine	500
No. of units in batch	5,000
Manufacturing OH caused by setup - per unit	0.1
Manufacturing OH per machine hour	18
No. of units produced per machine hour	50
Manufacturincaused by production - per unitg OH	0.36
Total Manufacturing OH - Per unit	0.46

Advantages of ABC Costing:

--Helps in cutting costs by providing reliable information on the opportunities available for reducing costs

--Assists management in making quality decision by knowing the nature of each activity.

--Helps managers on focusing the forces on value adding activities and eliminating non-value adding activities

-- A proper cost allocation to various products leads to proper pricing policy

-- Assist managers to adopt productivity improvement approaches such as TQM, BPR etc

-- Identifies processes which are inefficient and target for improvements

-- Discovers the processes which have wasted and unnecessary costs