Activity Based Costing (ABC) Analysis for A2 Milk Company Products

This report presents an Activity-Based Costing (ABC) analysis for A2 Milk Company, focusing on the calculation of product costs for "Full Cream Fresh Milk" and "Full Cream Powdered Milk." The analysis identifies key cost drivers, including machine hours and the number of units produced, to allocate overhead costs across various activities such as milking, delivering, quality checks, pasteurization, homogenization, and packaging. The report provides detailed data on direct materials, direct labor, and indirect costs, including calculations for labor hour rates and overhead allocation. The ABC method is applied to determine the cost per unit for each product, offering a comprehensive understanding of the company's cost structure and providing valuable insights for pricing and profitability analysis. The report includes references to relevant academic literature on ABC and its application in manufacturing environments. The report highlights how ABC improves cost report accuracy and provides a better understanding of expenditures, helping businesses to build a much more efficient pricing structure.

Activity Based Costing

Table of Contents
TASK...............................................................................................................................................3
REFERENCES................................................................................................................................7

TASK
Activity Based Costing:
Activity-based costing (ABC) is a way of costing associated products or services with
overhead as well as indirect expenses. This costing method considers the interaction between
prices, operating operations, including manufactured goods, assigning indirect costs to items than
conventional costing approaches. Activity-based costing is most often used in manufacturing
industry because it improves cost report accuracy, thereby achieving more actual costs and
further classifying business's costs throughout its production processes (Schulze, Seuring and
Ewering, 2012). In targeted costing, inventory costing, product range productivity analysis,
consumer profitability assessment, and product pricing, such costing method is used. Costing
depending on activity is often used to gain a better understanding of expenditures, helping
businesses to build a much more efficient pricing structure.
In this assessment A2 Milk Company, wants to estimate aggregate product cost per unit.
Company has two key products “ Full Cream Fresh Milk” and “Full Cream Powdered Milk”.
The main formula for Activity-based costing method is aggregate cost pool is being divided by
cost driver. The cost driver's rate is being used to determine the figure of overhead as well as
indirect costs associated with a specific activity in task-based costing (Monroy, Nasiri and
Peláez, 2014). The operation can be viewed as a cost driver under ABC model as any operation
or event A cost-driver is being used to relate to an assignment base, also recognized as activity
driver. Identification of Cost drivers is important task under ABC as they directly influence
business' core activities.
Managing personnels chooses cost drivers as ground for allocating company's
manufacturing overhead (Özkan and Karaibrahimoğlu, 2013.). Here no industry wise standards
or policies exist which stipulates or mandate specific cost driver to be selected. Company
management selects cost drivers based on the variables of the expenses incurred during
production. Here in this regard A2 Milk Company has following cost-drivers:
Activity Cost Pool Cost Driver
1. Milking cow (with milking machine) Machine hours
2. Delivering milk through tankers Number of units produced

3. Quality check Number of units produced
4. Pasteurisation of milk Machine hours
5. Homogenisation of milk Machine hours
6. Packaging and labelling of milk Number of units produced
Definitions of cost drivers involve machine installs, proposals for repairs, power
consumption, purchase orders, standard checks, and production orders. ABC strengthens the
costing system in several ways. Firstly, it increases the amount of cost pools which can be used
for overhead cost assembling (Khataie and Bulgak, 2013). It pools costs by operations rather
than storing all costs in one business-wide pool. Here in this context following is data and
calculations of cost per unit applying activity based costing for The A2 Milk Company:
Products
Full Cream
Fresh Milk
Full Cream
Powdered Milk Total
Sales and production (units) 350 250 600
Raw Material Usage 35 27 19000
Direct materials cost ($/unit) 25 21
$14,000.
00
-Milk 12.5 11.5
-Water 3.5 3.2
-Label Strikers 1.2 0.9
-Plastic Milk Bottles 7.8 5.4
Direct labour hours (hour/unit) 4 4 2400
-Farmers 2 1.5
-Factory Workers 1 1.5
-Delivering Staff 1 1

Indirect Material Cost (hours/unit) 19 18 11150
-Hygiene equipment 10 12
-Machine oils 3 3
-Lables 2 2.5
-Tape 1 0.5
-Cow Tracker 3 0
Indirect Labour Costs (hours/unit) 5 4 2750
-Receptionist 0.5 0.75
-Manager of factory 1.5 1.5
-Janitors 1 0.25
-Mechanic 2 1.5
Machine hours (hour/unit) 4 2 1900
Direct labour cost ($/unit) 30.4 30.4 18240
Indirect Labour Costs ($/unit) 38 30.4 20900
Calculation of the labour hour rate. In this case, consider that overhead cost are absorbed
on a labour hour basis:
Total overhead ($) 19000
Number of hours 2500
Labour rate ($/hour) 7.6
Identification of cost drivers:
Cost pools Driver Value of driver
Milking cow (with milking machine) Machine Hour rate $2.0

Delivering milk through tankers Units produced(No.) $6.4
Quality check Units produced(No.) $5.7
Pasteurisation of milk Machine hours rate $1.8
Homogenisation of milk Machine hours rate $1.3
Packaging and labelling of milk Units produced(No.) $1.1
Overhead costs
Milking cow (with milking machine) $ 3,750.00
Delivering milk through tankers $ 3,850.00
Quality check $ 3,400.00
Pasteurisation of milk $ 3,500.00
Homogenisation of milk $ 2,500.00
Packaging and labelling of milk $ 2,000.00
Total $ 19,000.00
Overhead cost A B
Machine Cost $ 7.89 $ 3.95
Delivering Cost $ 6.42 $ 6.42
Quality check Cost $ 5.67 $ 5.67
Pasteurisation cost $ 0.02 $ 0.01
Homogenisation Cost $ 0.02 $ 0.01
Packaging and labelling cost $ 0.01 $ 0.01

Total overhead $ 20.03 $ 16.06
Calculate cost per unit
Cost A B
Direct materials $ 25.00 $ 21.00
Direct labour $ 30.40 $ 30.40
Indirect Material $ 19.00 $ 18.00
Indirect Labour $ 38.00 $ 30.40
Overhead $ 20.03 $ 16.06
Unit cost $ 112.40 $ 99.80