Example 2 ABC

The company manufactures and markets two products: P1 and P2.

Direct unit costs (materials, labor, energy etc.) in September were of 750 mu and 1,000 mu
for P1 and P2 respectively. They include, among others, materials 350 mu and 550 mu for P1
and P2. A product requires 2 hours of direct labor.
During the period considered, the indirect costs have amounted to 5,612,500 mu, selling
10,000 units P1 and 1,500 unit P2, the price of 1,500 mu for P1, 2.000 mu for P2. No stock
was registered at the beginning or at the end of the month.
The traditional costing method used by the company for the cost of production adds to the
direct cost of production of each product a share of production expenses charged under the
following distribution table:

Center Purchasing Production Administrative

and
distribution
expenses
Primary 2,162,500 2,300,000 1,150,000
distribution
The basis for Raw materials Direct labour 1 sold product
allocating purchased hours

This method of calculation is not agreed by the management. Therefore, it implemented the
ABC method.
The analysis of the operational activities for the company can be summarized as follows:

Activity Value Drivers Center

Administration 402,500 1 mu to added Administrative
and financing cost (direct cost and distribution
only)

Order materials 600,000 Order number Purchase

Marketing 747,500 Number of Administrative
products products and distribution
Contraction 562,500 Number of Purchase
products suppliers
Production 1,380,000 Direct labour Production
hours
Inventory 1,000,000 Number of types Purchase
management of materials
Preparation and 920,000 Batch number Production
launch of
production

Information:
 Drivers Total Of which specific
P1 P2
Number of orders 100 30 70
Number of 75 11 16
suppliers
Number of types 250 29 44
of raw materials
Number of 50 12 38
batches

Suppliers are largely common to both products. This is true for a number of types of
materials.
From a study conducted in the Supply department, it appears that the common drivers of
products P1 and P2 are apportioned according to the report: one third / two thirds.
Required:
1. Calculate the full costs of the two product units, P1 and P2, using the full costing
method.
2. Do the same calculations when applying ABC method.