CALCULATION OF PRODUCT COST UNDER TRADITIONAL COSTING METHOD

Particulars Widgets Gadgets

Direct Materials $100,000.00 $200,000.00
Direct Labour $100,000.00 $300,000.00
PRIME COST $200,000.00 $500,000.00
Overhead (200% of Labour) $200,000.00 $600,000.00
TOTAL COST $400,000.00 $1,100,000.00
No. of units manufactured 1000 1000
Cost per unit $400.00 $1,100.00

CALCULATION OF PRODUCT COST UNDER ABC COSTING

Overhead Cost Estimated Overhead Cost Allocation Base
Depreciation $300,000.00 Machine Hours
Set Up $700,000.00 Set Up Hours
Rent $1,000,000.00 Sq Feet

TOTAL OVERHEAD COSTS PER CATEGORY OF PRODUCT

Overhead Cost Widgets Gadgets
Machine Hours $50,000.00 $90,000.00
Set Up Hours $140,000.00 $210,000.00
Rent $200,000.00 $300,000.00
TOTAL OVERHEAD COSTS $390,000.00 $600,000.00

CALCULATION OF PRODUCT COST UNDER ABC COSTING METHOD

Particulars Widgets Gadgets
Direct Materials $100,000.00 $200,000.00
Direct Labour $100,000.00 $300,000.00
TOTAL OVERHEAD COSTS $390,000.00 $600,000.00
TOTAL COST $590,000.00 $1,100,000.00
No. of units manufactured 1000 1000
COST PER UNIT $590.00 $1,100.00

Difference in Unit Cost (ABC VS TRADITIONAL ) $190.00 $0.00

INCREASED OR DECREASED INCREASED NO CHANGE
RATE OF DIFFERENCE 47.5% 0.0%

Widgets Gadgets
Cost per unit $400.00 $1,100.00
Assumed Selling Price (140% of traditional cost) $560.00 $1,540.00
Cost per unit as per ABC Method $590.00 $1,100.00
PROFIT / LOSS AS PER ABC METHOD -$30.00 $440.00
PROFIT / LOSS AS PER TRADITIONAL METHOD $160.00 $440.00

We have got the selling price assuming 40% profit , on Cost per unit based on
traditional method , because the selling price was originally fixed based on the cost
as per traditional method , hence we are comparing the selling price based on ABC
costs , and see the actual profit and loss we are making per product
 We have got the selling price assuming 40% profit , on Cost per unit based on
traditional method , because the selling price was originally fixed based on the cost
as per traditional method , hence we are comparing the selling price based on ABC
costs , and see the actual profit and loss we are making per product

Assuming 40% Profit margin , the products that are incorrectly priced are Widgets ( Over Priced ) , Smidgets
Gadgets are the only products that have similar prices.
If the business is small and startup , in that scenario they'll both give the same overhead costs. As the numb
small businesses.
NAL COSTING METHOD
Smidgets Smadgets
$150,000.00 $250,000.00
$400,000.00 $200,000.00
$550,000.00 $450,000.00
$800,000.00 $400,000.00
$1,350,000.00 $850,000.00
1000 1000
$1,350.00 $850.00

ABC COSTING
Quantity of CAB Activity Based O/H Rates
3000 $100.00 Cost per Machine Hour
1000 $700.00 Cost per set up hour
100000 $10.00 Cost per Square feet

OF PRODUCT
Smidgets Smadgets Wigets Gadgets
$40,000.00 $120,000.00 Machine Hours 500 900
$70,000.00 $280,000.00 Set Up Hours 200 300
$100,000.00 $400,000.00 Rent 20000 30000
$210,000.00 $800,000.00

COSTING METHOD
Smidgets Smadgets
$150,000.00 $250,000.00
$400,000.00 $200,000.00
$210,000.00 $800,000.00
$760,000.00 $1,250,000.00
1000 1000
$760.00 $1,250.00
ABC METHOD - TRADITIONAL COSTING METHOD
-$590.00 $400.00
DECREASED INCREASED RATE OF DIFFERENCE = DIFFERENCE IN UNIT COST / TRADITIONAL COS
-43.7% 47.1% PER UNIT

Smidgets Smadgets
$1,350.00 $850.00
$1,890.00 $1,190.00
$760.00 $1,250.00
$1,130.00 -$60.00 $1,480.00
$540.00 $340.00 $1,480.00

per unit based on

y fixed based on the cost
ling price based on ABC
product
 per unit based on
y fixed based on the cost
ling price based on ABC
product

ets ( Over Priced ) , Smidgets ( Low priced ) , Smadgets ( over priced ) ,

overhead costs. As the number of processes will be less in startups and

 Smidgets Smadgets
400 1200
100 400
10000 40000

METHOD

NIT COST / TRADITIONAL COST