Product Costing SLP

Report on Activity Based Costing

Introduction

Activity based costing is the best tool for refining a costing system Activity based costing systems refine costing systems by focusing on individual activities as the fundamental cost objectives . An activity may be an event , task or unit of work with a specified purpose

This report illustrates how ABC systems calculate the cost of individual activities and assign cost to cost objects on the basis of the activities undertaken in Newell Rubbermaid Incorporation

Background

Newell Rubbermaid Incorporated is a large group of company engaged

in the manufacturing and marketing of consumer and commercial products . It operates through the following five segments : Cleaning and organization Office products , Tools and Hardware , Home Fashion and other (Wright Reports

Under its contract with Giovanni Motors , a major automobile manufacturer , Newell Rubbermaid Incorporation supplies two types of lens namely simple lens S3 and a complex lens CL5

Recently Giovanni 's purchase manager has indicated that another supplier , who manufactures only S3 lens , is ready to supply the S3 lens at a price of 53 well below the Newell price of 63 . Newell management is under pressure to lower the price of S3 or discontinue the product . For this the management has to understand what it costs to make S3 and CL5 and why they are facing this problem with respect to S3 only

To cost products Newell are currently using Single Indirect pool system Under this system Newell calculates the distribution of 60 ,000 pcs of S3 and 15 ,000pcs of CL5 lenses . Then they determine the unit cost of the lens by dividing the lens by 60 ,000 for S3 and by 15 ,000 for CL5 . In the case of direct costs the above method of allocating is more or less accurate as it all the direct costs can be traced to S3 or Cl5 accurately

60 ,000 15 ,000

Simple Lens (S3 Complex lens (CL5

br Revenues (1 3 ,780 ,000 63 .00 2 ,055 ,000 137 .00 5 ,835 ,000

Direct Materials 1 ,125 ,000 18 .75 675 ,000 45 .00 1 ,800 ,000

Direct Labor cost 600 ,000 10 .00 195 ,000 13 .00 795 ,000

------------ --------- ------------- --------- --------------

870 ,000 58 .00 2 ,595 ,000

Indirect cost 1 ,800 ,000 30 .00 585 ,000 39 .00 2 ,385 ,000

Allocated ------------ ---------- -------------- --------- -------------

1 ,455 ,000 97 .00 4 ,980 ,000

Operating

Income (1 ) - (2 ) 255 ,000 4 .25 600 ,000 40 .00 855 ,000

Operating

Income / Revenue 6 .75 29 .2

Source : Horgren Foster and Datar (2002

It may be noted that the margins are low on S3 where the company has reached efficiency in production and the margins are much higher on the new , less-established product CL5

The direct costs are easily traceable to S3 and CL5 in an economical way . From the above it is clear that the allocation of indirect costs to the lens need to be refined

The best tool for achieving this is Activity...