Targets Activity Based Costing

The name of the organization is Microcel Ltd . Previously it had been in the business of selling computer hardware . Currently it has been developing business applications software in the field of human resource management . There are three areas in the company where cost control has become a concern . One is the shared usage of the printer . Another is the shared usage of the stationary . The third area of concern is the shared usage of company transportation . In the company income statements , all three cost categories are classified as overhead and deducted from

revenue lump sum . However recently the company has been experiencing increasing costs in all three areas and therefore the management has decided to investigate

The investigation could be simplified if the management were to use activity based costing . In trying to identify which operational processes are responsible for increasing costs , it is useful to look at the different departmental processes . At Microcel , there are six departments : system design , programming , testing , multimedia development and graphics design , marketing and sales , administration . The company is using two network printers and all six departments are sharing those printers . Printing costs have been rising in the last 1 year . Therefore the management has to find out if there is any one particular department which is responsible for increasing costs . Once that department has been identified , necessary cost controls could be initiated . In apportioning costs of the printers to each of the departments , it is necessary to apply activity based costing . In this case the resource is the printer The resource driver could be the amount of ink used by the department in a particular time period which could be one month . The activity could be the printing while the activity driver would be the printed . The cost object in this illustration is each of the six departments . Therefore , if the printers run out of ink twice a month then the cartridges have to be changed 24 times in a year . Activity based costing would enable the management the assign of changing cartridges to each of the departments as below

Assuming that it takes 29 to change one cartridge , the changing cartridges in a year is 696 . The next phase of the calculations is to determine how many pages have been printed in a year and of that of those 7200 pages , 1200 were printed by the programming department then this department has incurred the yearly printing cost of 116 696 /7200 1200 . In this manner , the remaining portions of the 696 dollars could be assigned to each of the departments and the department which has been experiencing rising costs could be identified

Costs in shared stationary have also been rising . Under the heading of stationary , many items are included . The principal items are printing , pens , pencils and markers . There are six departments which are using these categories of stationary . Depending on the level of detail required in the investigation , activity based costing could be applied to each category of stationary as applicable...