UCP: CA 06_Activity-based Costing AY 2019-2020

Universal College of Paranaque

College of Business & Accounting
CA 06 – ACTIVITY-BASED COSTING

LECTURE NOTES
Activity based costing (ABC) – is a systematic costing method that mainly uses “activities” as basis to
allocate overhead and indirect costs to products. ABC provides reliable data for product costing by
using multipole cost drivers that are more reflective of the actual causes of incurred overhead costs.

Steps in Implementing Activity-Based-Costing

1. Identify cost drivers (activities), cost pools and activity centers

• A cost driver is the particular activity that causes the incurrence of certain costs.
• A cost pool is a group of costs usually associated with a common cost driver.
• An activity center is a unit of organization that performs a set of tasks. It is part of production
process for which management wants a separate reporting of the costs of the activity involved.
i. Unit-level activities – performed each time a unit is produced.
ii. Batch-level activities – performed each time a batch of goods is handled or processed.
iii. Product-level activities – performed to support production (sales) of specific product type.
iv. Facility-level activities – performed to sustain a facility’s manufacturing process.
2. Calculate predetermined overhead rates for each identified activity.
3. Allocate overhead costs to the products on the basis of predetermined overhead rates.

Discussion Exercises:

Problem 1: Determine the appropriate level for each of the following activities.

1. Various individuals manage the parts inventories.

2. The personnel department trains new production workers.
3. Direct labor workers assemble products.
4. The materials storekeeper issues raw materials to be used in jobs.

Problem 2: Rada Company incures P800,000 in manufacturing overhead costs. The company has been
allocating overhead to individual product lines based on direct labor hours.

Cost Driver Amount in Cost Pool Amount of Activity

Direct labor hours P300,000 40,000
Number of batches P300,000 1,000
Number of shipments P200,000 500
Two products have the following characteristics:
Product X Product Y
Direct labor hours 2,000 1,000
Number of batches 20 100
Number of shipments 2 150
Required: Determine the overhead costs to be allocated to each product (X and Y) using a) Traditional
costing and b) Activity-based costing.

Cost Accounting by Joshua S. Umali, CPA Page 1 of 1

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