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ACTIVITY-BASED COSTING
T H E C A P I T A L. L E T U R E. S E R I E S 2 0 2 0
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What is activity-based costing?

Based on various actions Has multiple POH rates

- a cost accounting system based on various - multiple predetermined OH rates are then
repetitive actions that attain certain business calculated using the various cost drivers of
objectives organizational activities
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Ty p e s o f A c t i v i t i e s

WORKS DOESN’T WORK

VALUE-ADDING NON-VALUE ADDING

- increases the worth of a product or - increases the time spent on a

service to a customer and is one for product or service but does not
which the customer is willing to pay. increase its worth.
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Cost Flow
 Tagle Motors keeps careful track of the time related to orders 5
and their production. During the most recent three months,
the following average times were recorded for each unit of
order:

Wait time 7 days

Process time 2 days
Queue time 5 days
Problem No. 1 Inspection time 9.6 hours
Move Time 14.4 hours

Find:
1. Throughput time
2. Total non-value adding time
3. Manufacturing Cycle Efficiency
 Nueva Construction Inc. constructs houses in the Cordillera 6
mountains. The company has developed the following value
chart (in days):
Receiving Materials 2
Storing Materials 10
Measuring & Cutting
Materials 9
Handling Materials 7
Setting up Scaffolding 6
Problem No. 2 Assembly 3
Cutting and Framing doors
and windows 10
Sealing Joints 4
Municipality Inspection 6
Find:
1. Total value adding time
2. Total non-value adding time
3. Manufacturing Cycle Efficiency
 Aldana Company produces hotdog machines available in 7
three sizes, and has the following production and cost
information:

Jutay Daks Mega Daks

Units Produced 2,000 6,000 12,000
DL Hours 4,000 2,000 4,000
Number of
Problem No. 3 setups 100 150 250
Number of
shipments 200 225 275
Order Revisions 15 10 5
Overhead costs include setups P90,000; shipping costs P140,000; and
engineering costs P180,000.

Allocate the overhead costs to the segments using

traditional costing and ABC.
 Cacatian Co. has two major departments with the following 8
information:
Bultokachi Kalamantutay
Dept. Dept. Total
Annual Revenue Php 200,000 600,000 800,000
Annual salespeople
salaries Php 30,000 45,000 75,000
No. of Customers 50 75 125
Miles Driven 80,000 miles 40,000 120,000
The business also has overhead costs as follows:
Problem No. 4 Cost Pool Cost in Pool Driver
Travel Php 36,000 miles driven
number of
Entertainment 144,000 customers
Administrative 150,000 salaries
Total 330,000

Allocate the overhead costs to the segments using ABC.

 Alquizar Inc. has a total of Php 2,362,500 in production 9
overhead costs. The company’s products and related
statistics follow.
Weneklek Pututoy
DM in lbs. 139,500 190,500
DL Hours 30,000 37,500
Machine Hours 52,500 22,500
No. of Setups 430 860
No. of units 15,000 7,500
Problem No. 5 Alquizar Inc. uses the following activity centers, cost drivers, and
costs to apply overhead to products:

Cost Pool Cost Driver Cost

No. of machine
Utilities hours Php 750,000
Setup No of setups 193,500
Handling Pounds of DM 1,419,000

Allocate the overhead costs to the segments using ABC.