Conventional and Activity Based Costing in Accounting and Financial Management

AF102 – Introduction to
Accounting and Financial
Management Part II

TABLE OF CONTENTS
Conventional product costing system..........................................................................................3
Activity based costing (ABC)......................................................................................................3
A) Defining volume based driver.................................................................................................4
B) Calculating the cost per unit for each product using conventional method............................4
C) Calculating the cost per unit for each product using ABC method........................................5
D) Assessing reasons behind the occurrence of difference in per unit cost as per both the
methods........................................................................................................................................5
E) Activity based management....................................................................................................5
REFERENCES..............................................................................................................................6

Conventional product costing system
Manufacturing overhead costs allocated on the basis of machine hours per unit. Total
Three products X, Y, Z
Basis Product X Product Y Product Z
Direct Material 16*600= 9600 10*1300= 13000 20*7000= 140000
Direct Labour 600*0.5*7= 2100 1300*1.5*7= 13650 7000*1*7= 49000
Production
Overhead
600*1*25= 15000 1300*1*25= 32500 7000*2*25= 350000
Total 26700 59150 539000
Activity based costing (ABC)
Overhead cost pools Percentage Amount
Costs relating to set ups 20% 79500
Costs relating to machinery 18% 71550
Costs relating to material
handling
25% 99375
Costs relating to inspection 37% 147075
Total 100% 397500
The total overhead costs are 397500.
Overhead cost allocation: -
Overhe
ad cost
pools
Cost
drivers
Amou
nt
Product X Product Y Product Z Total
Costs
relating
to set
ups
Number
of set
ups
79500 60/590*79500
= 8085
110/590*79500
= 14822
420/590*79500=
56593
7950
0
Costs
relating
to
machine
ry
Machine
hours
71550 600/15900*71
550= 2700
1300/15900*71
550= 5850
14000/15900*71
550= 63000
7155
0