A COMPARISON BETWEEN A TRADITIONAL WITH ABC SYSTEM

Sam’s Inc. produces 2 products: Nice and Cool with the same equipment & process. The products
differ by volume. Nice is a high volume product while Cool is a low volume products. Details of
productions are as follows:

Machine DLH/ Annual Total Total No of purchase No of

hours/unit unit output (units) MH DLH orders set-ups

Cool 2 4 1.000 2.000 4.000 80 40

Nice 2 4 10.000 20.000 40.000 160 60
22.000 44.000 240 100

The cost of activities is as follows:

($)
Volume-related 110.000
Purchasing-related 120.000
Set-up-related 210.000
440.000

a. Traditional Costing System

Costs center allocated costs
Overhead rate per machine hour
Overhead rate per direct labor hour
Cost per unit: Cool
Nice
Total allocated to products: Cool
Nice
440.000
440.000/22.000 = 20 per machine hour
440.000/44.000 = 10 per direct labour hour
20 x 2.000/1.000 = 40 atau 20x2 atau 10x4
20 x 20.000/10.000 = 40 atau 20x2 atau 10x4
40 x 1.000 = 40.000
40 x 10.000 = 400.000

b. ABC System
Activities
Volume-related Purchasing-related Set-up related

Cost traced to activities 110.000 120.000 210.000

Consumption of 22.000 240 100
activities (cost drivers)
Cost per unit of 5 500 2.100
consumption
Cost traced to products:
Cool 10.000 (5x2000) 40.000 (500x80) 84.000 (2100x40)
Nice 100.000 (5x20.000) 80.000 (500x160) 126.000 (2100x60)

Cost per products:

Cool = 134.000/1.000 = 134/products
Nice = 306.000/10.000 = 30,6/products