Product: AA

BB
CC
Production Cost: Labour Cost
Selling & Administration Cost: Number of units

Use ABC system

Activities Identified Cost Type Cost Driver

Sales order processing Selling and Admin No. of Orders
Materials purchasing Production No. of Purchase Orders
Inventory Management Production No. of Parts per Unit
Machine Set-Up Production Set-Up Hours
Other Production Overhead Production Machine Hours
Packing and Delivery Selling and Admin No. of Deliveries
TOTAL

Products AA
Budgeted Units 100,000

Budgeted Driver Units

No. of Sales Orders per product 20
No. of Purchase Orders per product 30
No. of Parts per Unit 6
Set-Up Hours per Product 50
Machine Hours per Unit 6
No. of Deliveries per product 20
Budget Direct costs per Unit
Direct Materials $ 5
Direct Labour $ 3
Selling Price per Unit $ 15

Sell 1000 units

CC 20 orders

BUDGETED COST PER UNIT

Activities Identified Cost Type Cost Driver
Sales order processing Selling and Admin No. of Orders
Materials purchasing Production No. of Purchase Orders
Inventory Management Production No. of Parts per Unit
Machine Set-Up Production Set-Up Hours
Other Production Overhead Production Machine Hours
Packing and Delivery Selling and Admin No. of Deliveries

COST PER UNIT AND GROSS MARGIN % PER PRODUCT

Activities Identified Cost Driver Budgeted Overhead
Production Costs Direct Labor Costs $620,000
Selling and Administration No. of Units $220,000

AA BB
Budgeted Cost per Unit
Direct Materials $ 5.00 $ 8.00
Direct Labour $ 3.00 $ 4.00
Overhead Allocated $ 4.70 $ 5.80
Total $ 12.70 $ 17.80

Budgeted Gross Profit Margin

Revenues $ 15 $ 25
Cost of Sales $ 12.70 $ 17.80
Gross Profit $ 2.30 $ 7.20
Gross Profit Margin 15% 29%

ALLOCATE OH COST USING COST PER DRIVER AND DETERMINE TOTAL BUDGETED COST PER UNIT AND BUDGETED GROSS M
Activities Identified AA BB
Sales order processing $2,703 $6,757
Materials purchasing $37,500 $25,000
Inventory Management $41,379 $55,172
Machine Set-Up $21,429 $34,286
Other Production Overhead $46,154 $61,538
Packing and Delivery $8,947 $26,842
Total $158,112 $209,595
Budgeted Units 100,000 50,000
Budgeted Overhead per Unit $2 $4

Budgeted Cost per Unit

Direct Materials $ 5 $ 8
Direct Labour $ 3 $ 4
Overhead Allocated $ 2 $ 4
Total $ 10 $ 16

Budgeted Gross Profit Margin

Revenues $ 15 $ 25
Cost of Sales $ 10 $ 16
Gross Profit $ 5 $ 9
Gross Profit Margin 36% 35%

ABM to determine the efficiency

OLD

AA BB
Actual Production x Actual Rates
Actual Production x Budgeted Rates
Budgeted Production x Budgeted Rates
It cannot be inferred right away if the the purchasing department performed efficiently because the cost was grouped togethe

NEW

AA BB
Actual Production x Actual Rates
Actual Production x Budgeted Rates
Budgeted Production x Budgeted Rates

It is apparent in this analysis that the purchasing department may have an unfavorable overhead spend but has overall perfor
Budgeted Overheard
$50,000
$100,000
$200,000
$120,000
$200,000
$170,000
$840,000

BB CC Total
50,000 10,000 160,000

50 300 370
20 30 80
8 15 29
80 150 280
8 12 26
60 300 380

$ 8 $ 15 $ 28
$ 4 $ 6 $ 13
$ 25 $ 60 $ 100

Budgeted Overheard Total Units Budgeted OH p.u

$50,000 370 $135
$100,000 80 $1,250
$200,000 29 $6,897
$120,000 280 $429
$200,000 26 $7,692
$170,000 380 $447

Budgeted Units Cost per Diver Unit

$560,000 1.11
 $160,000 1.38

CC

$ 15.00
$ 6.00
$ 8.02
$ 29.02

$ 60
$ 29.02
$ 30.98
52%

NIT AND BUDGETED GROSS MARGIN %

CC Total
$40,541 50,000
$37,500 100,000
$103,448 200,000
$64,286 120,000
$92,308 200,000
$134,211 170,000
$472,293 840,000
10,000
$47

$ 15
$ 6
$ 47
$ 68

$ 60
$ 68
-$ 8
-14%

CC Total
-
- favorable overhead spending variance
- unfavorable overhead efficiency variance
the cost was grouped together with other departments.

CC Total

unfavorable overhead spending variance

favorable overhead efficiency variance

spend but has overall performed efficiently contrary to the previous analysis
spending variance
d efficiency variance
 d spending variance
efficiency variance