Cost Allocation and Activity-Based Costing - Variable Costing

Question 2b

Overhead Details No . of cost driver Allotment Working Cost Allotted

Material ing 620 ,000 /1 ,000 620 620 x 800 496 ,000

Materials Insp . 2 ,000 /300 6 .66 6 .66 x 1 ,333 .33 8 ,880

Equipment Setup (20 ,000 x 2 /100 400 400 x 1 ,000 ,000 4 ,000 ,000

Quality Control (20 ,000x400 /4 ,000 2 ,000 2 ,000 x 2 ,250 4 ,500 ,000

Others N /A 125 x 120 ,000 15 ,000 ,000Direct Materials 20 ,000 x 31 620 ,000

Direct Labor 20 ,000 x

6 120 ,000

c

Overhead Details Cost Allotted Overhead Cost per Unit

Material ing 496 ,000 24 .80

Materials Insp . 8 ,880 0 .44

Equipment Setup 4 ,000 ,000 200

Quality Control 4 ,500 ,000 225

Others 15 ,000 ,000 750 d . Direct Materials 620 ,000

Direct Labor 120 ,000

Manufacturing Overheads 24 ,004 ,880

Remote Mouse 79 .58 x 120 ,000 9 ,549 ,600

Under the traditional absorption costing system , a one blanket overhead absorption rate like the one worked in this part may lead to an inaccurate allocation of the firm 's overheads . This is particularly the case for organization , in which one department is labor intensive , while the other capital intensive . In these instances , the product manufactured in the labor intensive section will be allocated more overheads than the other one . Activity Based Costing diminishes such weakness by focusing on the drivers of such costs and set an apportionment bases applicable to such cost driver . This thus leads to a more accurate and reliable allocation of overheads

References

Drury C (1996 . Management and Cost Accounting . Fourth Edition . New York : International Thomson Business Press

Lucey T (1997 . Costing . Fifth Edition . London : Letts Educational

Lucey T (2003 . Management Accounting . Fifth Edition . Great Britain Biddles Limited

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