Cost Accounting Tutorial

10th Meeting – Activity-Based Costing

Teaching Assistant Team
Problem 1
Parker Company produces mathematical and financial calculators and operates at capacity. Data
related to the two product are presented here:

Mathematical Financial
Annual production in units 50,000 100,000
Direct material costs $150,000 $300,000
Direct manufacturing labor costs $50,000 $100,000
Direct manufacturing labor-hours 2,500 5,000
Machine-hours 25,000 50,000
Number of production runs 50 50
Inspection hours 1,000 500

Total manufacturing overhead costs are as follows:

Total
Machining costs $375,000
Setup costs $120,000
Inspection costs $105,000

Instructions:
1. Choose a cost driver for each overhead cost pool and calculate the manufacturing
overhead cost per unit for each product.
2. Compute the manufacturing cost per unit for each product.

Problem 2
Braun Corporation is a manufacturing company, which process three kinds of leather related
product, which are bags, purse, and wallet. Right now, the company has difficulties in
determining the profitability of which of the product, and therefore is considering implementing
Activity Based Costing system. After several interview and research, the company determines
seven activities which are: (1) Scheduling production, (2) Run purchasing materials, (3) Moving
materials, (4) Set-up machine, (5) Making product, (6) Inspecting product, (7) Packaging
product.

Direct cost to produce one unit of each of the product are: (in Rp.)
Bags Purse Wallet
DM 9,000 / bag 8.000 / purse 10.000 / wallet
DL 2,000 / bag 2.500 / purse 2.200 / wallet
The company already performed the first stage of ABC, which was allocating the indirect cost to
each of the activities. Now the company is trying to do the second stage allocation. Results of the
first stage allocation were stated bellow: (in rupiah)

Scheduling Production
Run 37.482.500,00
Purchasing Materials 24.120.000,00
Moving Materials 71.981.250,00
Set-up the Machine 39.878.750,00
Making Product 580.530.000,00
Inspecting Product 92.187.500,00
Packaging products 41.820.000,00

The activity drivers (cost drivers) to allocate each of the activities to products are listed bellow.
(you have to match the activity drivers listed – one driver for one action only)

Cost Driver Bags Purse Wallet

number of run scheduled
packaging hour per unit
number of moves per run
inspection hour per run
number of purchase order
machine hour per unit
set up hours per run
500 run 750 run 750 run
0,05 hours per unit 0,03 hours per unit 0,02 hours per unit
3 moves per run 4 moves per run 5 moves per run
2 hours per run 3 hours per run 4 hours per run
300 purchase order 400 purchase order 500 purchase order
0,1 per unit 0,12 per unit 0,15 per unit
0,25 hours per run 0,35 hours per run 0,5 hours per run

Other information given by the company was:

Bags Purse Wallet

Unit produced 66.000 unit 33.000 unit 11.000 unit
Price per unit (Rp) 18.150/unit 27.500/unit 30,800 / unit

Based on the information given, please answer the following questions:

1. Calculate the profitability of each product using the traditional method, assuming that all
of the indirect costs will be allocated using machine hours
2. Calculate the profitability of each product using the ABC method