Example 1

Overhead Costs
Material Handling 65000
Engineering 48000
Power 94500
Total 207500

Traditional Method
Overhead Costs 207500
Allocation Basis 325000 DM Cost (113750+211250)
Allocation Rate 0.64 per DM $

Share of Compact 72625

(0.64 x 113750)

ABC Method Compact Deluxe Total

DM Cost 113750 211250 325000
Change Notices 9 3 12
Kw Hrs 84000 126000 210000

1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver

Material Handling 65000 DM Cost 325000 0.2 per DM $
Engineering 48000 Change Notice 12 4000 per Change Notice
Power 94500 Kw Hrs 210000 0.45 per Kw Hr

4. Allocate Overheads = AR x Drivers Consumed

Driver Con AR Compact
Material Handling 113750 0.2 22750
Engineering 9 4000 36000
Power 84000 0.45 37800
Total Share of Compact 96550

Example 2

Overhead Costs
Registration 75000
Patient Care 900000
Billing 120000
Total 1095000

Traditional Method
Overhead Costs 1095000
Allocation Basis 150000 Nursing Hrs
Allocation Rate 7.30 per Nursing Hr

Share of A 730 (7.30 x 100 Hrs)

Share of B 438 (7.30 x 60 Hrs)
ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Registration 75000 Patients 1000 75 per Patient
Patient Care 900000 Nursing Hrs 150000 6 per Nursing Hr
Billing 120000 Bills 2500 48 per Bill

4. Allocate Overheads = AR x Drivers Consumed

Driver use A Driver use B
Registration 1 75 1 75
Patient Care 100 600 60 360
Billing 2 96 3 144
Total 771 579

Example 3

Overhead Costs
Quality Control 78000
Machine Time 188000
Material Handling 1200
Misc. OH 59000
Total 326200

ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Quality Control 78000 Inspections 1200 65 per Inspection
Machine Time 188000 Machine Hrs 800 235 per Mhr
Material Handling 1200 Batches 50 24 per Batch
Misc. OH 59000 DL Hours 5000 11.8 per DL Hr

4. Allocate Overheads = AR x Drivers Consumed

Drivers Order Cost
Quality Control 375 24375 (375 x 65)
Machine Time 220 51700 (220 x 235)
Material Handling 8 192 (8 x 24)
Misc. OH 840 9912 (840 x 11.8)
Total 86179

Example 4

Overhead Costs
Purchase Order 84000
Rework Order 216000
Product Testing 450000
Machining 1250000
Total 2000000

Traditional Method
Overhead Costs 2000000
Allocation Basis 40000 DL Hours
Allocation Rate 50.00 per DL Hour

Deluxe Regular
DM 150 112
DL 16 8
OH Allocated (50 x 1.6) 80 (50 x 0.8) 40
Total MFG Cost (DM+DL+OH) 246 160

ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Purchase Order 84000 Purchase Orders (400+600) 1000 84 per Purchase Order
Rework Order 216000 Rework Order (200+600) 800 270 per Rework Order
Product Testing 450000 Tests (4000+6000) 10000 45 per Test
Machining 1250000 Machine Hrs(20000+30000) 50000 25 per Mhr

4. Allocate Overheads = AR x Drivers Consumed

Driver use Deluxe Driver use Regular
Purchase Order 400 33600 600 50400
Rework Order 200 54000 600 162000
Product Testing 4000 180000 6000 270000
Machining 20000 500000 30000 750000
TOTAL 767600 1232400
Total Units 5000 40000
OH Cost per unit 153.52 30.81

Total Mfg Cost Deluxe Regular

DM 150 112
DL 16 8
OH Allocated 153.52 30.81
Total MFG Cost (DM+DL+OH) 320 151

Example 5

ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Machining 195000 Machine Hrs 13000 15 per Mhr
Machine Setup 90000 Setups 150 600 per Setup
Product Design 64000 Products 2 32000 per Product
General Factory 280000 DL Hrs 10000 28 per DL Hr
4. Allocate Overheads = AR x Drivers Consumed
Driver use Q21F Driver use H44W
Machining 9000 135000 4000 60000
Machine Setup 80 48000 70 42000
Product Design 1 32000 1 32000
General Factory 6000 168000 4000 112000
TOTAL 383000 246000

Example 6

ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Cleaning 263784 Hours 34800 7.58 per Hr
Job Support 145180 Jobs 7000 20.74 per Job
Client Support 4774 Clients 220 21.7 per client

4. Allocate Overheads = AR x Drivers Consumed

Driver used
Cleaning 90 682.2
Job Support 45 933.3
Client Support 1 21.7
TOTAL 1637.2
Sales 2000
Profit 362.8

Example 7

ABC Method
1. Identify Overhead Costs 2. Identify Cost Drivers 3. Calculate AR =Cost/Driver
Assembly 228060 Machine Hrs 18000 12.67 per Mhr
Processing Orders 34068 Orders 1200 28.39 per Order
Inspection 125560 Insp Hrs 1720 73 per Insp Hr

4. Allocate Overheads = AR x Drivers Consumed

Driver used
Assembly 460 5828.2
Processing Orders 80 2271.2
Inspection 10 730
TOTAL OH 8829.4
DM (48.96X420) 20563.2
DL (25.36X420) 10651.2
Total MFG Cost (DM+DL+OH) 40043.8