Running Heading: Using activity-based accounting (ABC) to allocate overhead costs

TITLE: Using activity-based accounting (ABC) to allocate overhead costs

Business Administration, UNIVERSITY OF THE PEOPLE
BUS 3304: MANAGERIAL ACCOUNTING
Michael Marslek (Instructor)
Date:26/06/2021

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Running Heading: Using activity-based accounting (ABC) to allocate overhead costs

Introduction:

Activity-based costing (ABC) an approach for precisely apportioning overhead costs by relating

them to activities (Bragg, 2021). When costs are allocated to activities, the cost can be related to

the cost objects that uses the activities. This system is perfectly good for reduction of targeted

overhead costs (Bragg, 2021). It works well in complex situation that they are many machines

and products and tangled activity which are not easy to classify and is less use where production

activity are abbreviated (Bragg, 2021).

The steps of ABC are

Step 1. Identify costly activities required to complete products.

Step 2. Assign overhead costs to the activities identified in step 1

Step 3. Identify the cost driver for each activity.

Step 4. Calculate a predetermined overhead rate for each activity

Step 5. Allocate overhead costs to products.

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Running Heading: Using activity-based accounting (ABC) to allocate overhead costs

a) . Using the estimates for the year, compute the predetermined overhead rate for each
activity (this is step 4 of the activity-based costing process).
Activity Cost Driver Estimated Estimated Cost Pre-determined
Overhead Driver Activity Overhead Rate
Costs
Production Number of $60,000 100 runs $600 per production
setups production units run
Materials Yards of $140,000 10000 yards $14 per yard
handling materials purchased
purchased
Quality control Number of $80,000 800 inspection $100 per inspection
inspections s
Total $280,000
(Graybeal et al., 2018)
b) Using the activity rates calculated in requirement a and the actual cost driver
activity levels shown for March, allocate overhead to the three products for the
month of March (this is step 5 of the activity-based costing process).
MX1 MX2
Pre-determined Cost Driver Overhead Cost Driver Overhead
Activity Allocated Activity Allocated
Overhead Rate
$600 per 3 $1,800 6 $3,600
production
run
$14 per yard 550 $7,700 230 $3,220
purchased
$100 per 40 $4,000 10 $1,000
inspection
Total $13,500 $7,820
Allocated
(Graybeal et al., 2018)

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Running Heading: Using activity-based accounting (ABC) to allocate overhead costs

References

Bragg, S. (2021, April 15). Activity-based costing definition. AccountingTools.

https://www.accountingtools.com/articles/2017/5/14/activity-based-costing.

Graybeal, P., Franklin, M., & Cooper, D. (2018, July 24). Calculate Activity-Based Product
Costs. Principles of Accounting Volume 2 Managerial Accounting.
https://opentextbc.ca/principlesofaccountingv2openstax/chapter/calculate-activity-based-
product-costs

Heisinger, K., & Hoyle, J. (2012). Managerial Accounting. Open Textbook Library.

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