A Detailed Report on Cost Calculation: Traditional and ABC Methods

This report provides a comparative analysis of traditional costing methods and activity-based costing (ABC) methods for calculating the cost per unit of a telephone. It begins by presenting the cost per unit using departmental rates under the traditional method, highlighting direct material, direct labor, and manufacturing overhead. The report then calculates the total costs based on this traditional approach. Subsequently, the report delves into the activity-based costing approach, detailing costs associated with machine setup, material receiving, inspection, and engineering. The cost per unit is then determined using ABC. The report concludes that while traditional costing is simpler, ABC offers a more accurate price per unit by considering the number of hours each unit consumes during production, making it suitable for businesses with high overhead costs. The adoption of ABC method can help identify areas of wasted expenses on unprofitable products, ultimately improving the company's pricing policy and competitive positioning. Desklib provides access to this and many other solved assignments.

MEMO 1
To: Mr. A
From: S
Date: June 2, 2018
Re: the calculation of costs using different methods
Context line: the calculation of costs using different methods
Action: ABC method should be adopted
The following table shows in the costs per unit of telephone using departmental rates:
(Amounts in $)
Particulars Basic Advanced
Direct material
800.0
0
1,600.0
0
Direct labour
600.0
0
600.0
0
Manufacturing overhead
800.0
0
800.0
0
Total variable costs
2,200.0
0
3,000.0
0
Add: overheads:
Fixing department
160.0
0
480.0
0
Testing department 120.0 40.0

MEMO 2
0 0
Total variable costs
2,480.0
0
3,520.0
0
For 1000 units
24,80,000.0
0
35,20,000.0
0
Add: fixed costs:
8,00,000.0
0
4,00,000.0
0
4,00,000.0
0
would be divided into 1:1 since each system requires in
equal number of direct labour hours
Add: departmental costs
16,00,000.0
0
8,00,000.0
0
8,00,000.0
0
would be divided into 1:1 since each system requires in
equal number of direct labour hours
Total costs on the basis
of traditional approach
36,80,000.0
0
47,20,000.0
0
divided by the number of
units
1,000.0
0
1,000.0
0
Cost per unit 3,680.0 4,720.0

MEMO 3
0 0
The following table shows in the costs per unit of telephone using activity based costing
approach:
(Amounts in $)
Particulars Basic Advanced
Direct material
800.0
0
1,600.0
0
Direct labour
600.0
0
600.0
0
Manufacturing
overhead
800.0
0
800.0
0
Total variable costs
2,200.0
0
3,000.0
0
Add: overheads:
Fixing department
160.0
0
480.0
0
Testing department
120.0
0
40.0
0

MEMO 4
Total variable costs
2,480.0
0
3,520.0
0
For 1000 units
24,80,000.0
0
35,20,000.0
0
Add: fixed costs:
8,00,000.0
0
4,00,000.0
0
4,00,000.0
0
would be divided into 1:1 since each system requires in equal
number of direct labour hours
Add: departmental
costs:
Machine set up
50,000.0
0
1,50,000.0
0
20000 to be divided
into 1:3
Material receiving
45,000.0
0
75,000.0
0
120000 to be divided
into 3:5
Inspection
70,000.0
0
90,000.0
0
160000 to be divided
into 7:9
Machinery related
2,80,000.0
0
5,60,000.0
0
840000 to be divided
into 1:2
Engineering
1,20,000.0
0
1,60,000.0
0
280000 to be divided
into 3:4
Total costs 34,45,000.0 49,55,000.0

MEMO 5
0 0
Divided by the number
of units 1000 1000
Cost per unit 3445 4955
The costs per unit under the 2 methods are very much different:
(Amounts in $)
Particulars Basic Advanced
Traditional
3,680.0
0
4,720.0
0
ABC 3,445.00 4,955.00
As could be seen from the above, the cost per unit under the traditional method for one
product is more and for one product is less when comparison is made between traditional and
ABC method.
The traditional costing method is very much simpler but does not give in the accurate results
of the price of any product (Small business chron, 2018).The ABC method gives in the most
accurate price of reach unit since it is based on the number of hours each unit consumes when
it comes to being produced. The ABC method is also very tough to being implemented and it
is suited for the businesses which have the highest overhead costs. With the allocation of

MEMO 6
overhead costs, it is easier to identify in the areas wherein the expenses are wasted on the
products that are not profitable (Strategic CFO, 2018).
Hence, the ABC method is the most apt method.
In respect of the pricing policy of the firm, the company would be in a better position since
the cost that it incurs for basic model has turned down to be lower than what was being
anticipated but higher for the Advanced model. Hence, the company would be able to price
low its one product which is good since that would help it capturing new customers who
would be able to afford the product at reduced price.

MEMO 7
References:
Traditional Costing Vs. Activity-Based Costing. (2018). Retrieved from
http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html
Wilkinson, J. (2018). Activity Based Costing vs Traditional Costing • The Strategic CFO.
Retrieved from https://strategiccfo.com/activity-based-costing-abc-vs-traditional-
costing/