Activity Based Costing Example / Problem / Format
Activity Based Costing Example / Problem / Format
Learning Objectives:
- Perform the first stage allocation of overhead costs to the activity cost pools.
- Compute activity rates for the activity cost pools.
- Construct a table showing the overhead costs of units and four orders.
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 |
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| 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:
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Distribution of Resource Consumption Across Activity Cost Pools |
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| 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.
- Office Mart is one of the Ferris Corporation’s customers. Last year Office Mart ordered filing cabinets four different times. Office Mart 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:
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Activity Cost Pools |
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| 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 |
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| Total activity | $280,000 | $310,000 | $100,000 | $110,000 | $800,000 |
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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 |
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| $1,840 | ||
| ========== | ||
| Customer Profitability Analysis – OfficeMart | ||
| Product margin (above) | $1,840 | |
| Less: Customer support overhead (above) | 1,000 | |
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| $840 | ||
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You may also be interested in other relevant articles from “activity based costing system” chapter:
- Definition and Explanation of Activity Based Costing System
- Treatment of Manufacturing, Non-manufacturing and Idle Capacity Costs Under Activity Based Costing System
- Activity Based Costing And Top Management
- Activity Based Costing System and External Reports
- Designing and Implementing Activity Based Costing System
- Targeting Process Improvements (Activity Based Costing + Activity Based Management)
- Advantages or Benefits | Disadvantages or Limitations of Activity Based Costing System
- Activity Based Costing Example
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