MANAGEMENT ACCOUNTING-1

DENISON MINES
ACTIVITY BASED COSTING
(ABC)

CASE STUDY 2
BY VAMSHI BOLLAM
HU21MGMT0200008
 WHAT IS ACTIVITY BASED
COSTING?

• Activity-based costing is a costing method

that identifies activities in an organization
and assigns the cost of each activity to all
products and services according to the
actual consumption by each.
LIMITATIONS OF ABC COSTING METHOD

• ABC is time consuming and costly.

Setup costs and updating cost for example in the automobile

industry is very high and ABC fails to inculcate it.

Business with similar product and services output that require

similar activities then the benefits from ABC are very limited.
SOLVING DENISON MINES COSTING PROBLEM WITH ABC ACCOUNTING METHOD
DENISON MINES MARKETS TWO TYPES OF PRODUCTS IN THE BUSINESS SERVICES INDUSTRY. FOR SAKE OF SIMPLICITY LET US
CALL THEM SERVICES STANDARD PRODUCT AND SERVICES CUSTOM PRODUCT. STANDARD PRODUCT IS LOT SIMPLER THAN
CUSTOM PRODUCT, SO DENISON MINES PRODUCES STANDARD PRODUCT IN LARGE BATCH SIZES COMPARE TO CUSTOM
PRODUCT WHICH IS PRODUCED IN SMALLER BATCH SIZES.
 QUESTION
Denison
Mines
Denison Mines Custom
Standard Product Overhead Cost
Product Analysis USD Cost Drivers
Set Up Costs 73330 Number of Set
Annual Sales (Units) 11508 12739 Ups
Sales Price (Per Unit) 67 USD 87 USD Special part 60789 Number of
Batch Size (units) 1000 50 handling cost Special Parts
Direct Labor Time / per unit 2 2.5 Customer 28961 Number of
invoicing cost Invoices
Direct Labour rate per hour 8 8
Material 62234 Number of
Direct Input cost per unit 22 32 handling cost Batches
Number of Custom Parts per unit 1 4 Other 107519 Labor Hours
Number of Set-Ups per batch 1 3 overheads
Separate Material per batch 1 1
Number of Sales Invoices - issued 50 240
per year
 ACTIVITY BASED COSTING SYSTEM FOR DENISON MINES

STEP 1- ESTABLISHING COST POOL FOR EACH ACTIVITY BASED ON THE BUSINESS SERVICES
DYNAMICS.

STEP 2 - ALLOCATING TOTAL COST ASSOCIATED WITH EACH ACTIVITY TO THE RELEVANT POOL.

STEP 3- CALCULATING PER UNIT COST BASED ON THE RELEVANT COST DRIVER.

STEP 4 FINAL STEP - DIVIDING THE AMOUNT IN EACH POOL BY ESTIMATED TOTAL USAGE OF THE
COST DRIVER. THEN THE UNIT COST IS MULTIPLIED BY THE NUMBER OF UNITS OF THE COST
DRIVER OF THAT SPECIFIC PRODUCT.
 ABC CALCULATIONS

(a) (b) (c) (f)

Standard Custom Total Diver Standard (g) Custom
Over Diver Diver Volume (d) (e) Driver Total Cost Total Cost Standard Custom
head Cost Driver Volume Volume a+b Costs USD Rate (d/c) (a*e) (b*e) Unit Costs Unit Costs
Set Up Set-up per 12 720 732 73330 100.17759 1202.1311 72127.868 0.1044604 5.6619725
Costs Batch 562842 47541 852459 7510784 922332

Special Special 11508 50956 62464 60789 0.9731845 11199.407 49589.592 0.9731845 3.8927382
part Parts per 5430328 850922 149078 5430328 172131
handling unit
cost

Customer Invoices 50 240 290 28961 99.865517 4993.2758 23967.724 0.4338960 1.8814447
invoicing per year 241379 62069 137931 6031187 082134
cost

Material Number of 11.508 254.78 266.288 62234 233.70936 2689.5273 59544.472 0.2337093 4.6741873
handling Batches 730157 989064 601094 6730157 460314
cost

Other Labor 23016 31847.5 54863.5 107519 1.9597546 45105.713 62413.286 3.9195093 4.8993866
overheads Hours 638475 343115 656885 276951 596189
Per Unit Overhead Cost using ABC

Total Cost Using ABC Technique

Custom Product
Overhead Unit Cost Standard Custom Standard Product
Set Up Costs 0.10446047510784 5.6619725922332 Direct Costs
Special part handling 0.97318455430328 3.8927382172131 Labor 16 20
cost Hours * Cost of
Customer invoicing 0.43 1.88 Labor per Hours
cost Material 22 32
Material handling 0.23370936730157 4.6741873460314
cost Indirect Costs
Other overheads 3.9195093276951 4.8993866596189
ABC- Overhead 5.66 21.01
Total Overheads 5.66 21.01
Total Costs Per Unit 43.66 73.01
(1+2+3)

The Total Cost per unit of Standard product is 43.66

The Total Cost per unit of Custom product is 73.01

 RETURN ON SALES USING ABC COSTING
ANALYSIS
Standard Custom
Product Product

USD per Unit USD per Unit

Selling Price 67 87
Total Cost 43.66 73.01
Profit 23.34 13.99
Return on Sales 34.83 16.081

The profit per unit of standard product is higher than custom product under ABC technique.By comparing
the Return on Sales numbers under both traditional and ABC technique - We can easily conclude that ABC
is far more effective costing technique for Denison Mines as it stops inefficient allocation of costs to
Standard product. Denison Mines should focus on standard product rather than custom product as
standard product is delivering much higher returns on sales.