Activity based Costing

Indirect labour
50% of the indirect labour cost are caused by production run

40% of the indirect labour cost are caused by physcial change from
one colour to another called setup cost
10% of the time was used by activity parts Administration(Book
keeping)

20% allocated to supporting activities

80% of computer resources were used to produce batchesand are

closely related to handling of production batches

3 Categories of indirect cost remained

Machine
Machine Maintanance
Energy
These cost were incurred for activities Support

Distribution of total cost on the basis of Activities

Production run
Indirect labour & Fringe benefit 28000 50%
Machinery, maintenance and energy 14000
Computer system 10000 80%

Activities Activity cost Unit of measure

Production run 22000 150
Set up 11200 526
Parts Administration 4800 4
Support 14000 10000
Total Activity expense 52000

Income statement as per ABC costing

Blue Black
Sales 75000 60000
Material cost 25000 20000
Direct labour 10000 8000
Direct Labour Fringe(40%) 4000 3200
Machine run expense 7000 5600
Production run 7,333 7,333
Set up 4,259 1,065
Parts administration 1200 1200
Total Operating Cost 58,792 46,398
Total Operating Income 16,208 13,602
Return on Sales 21.61% 22.67%
Observations :- Company is making loss in selling Red and Purple
Colour pens as the Overhead Costs are high
Recommendations :- Increase the sales Price of red and Purple
Colour pens , Minimize the overhead costs
Set up Parts Administration Machine Runs
40% 10%
100%
20%

Activity cost driver rate

146.7
21.3
1200
1.4

Red Purple Total

13950 1650 150600
4680 550 50230
 1800 200 20000
720 80 8000
1260 140 14000
5,573 1,760 22000
4,855 1,022 11,200
1200 1200 4800
20,088 4,952 130,230
-6,138 -3,302 20,370
-44.00% -200.12% 13.53%