Shows the difference between traditional costing and activity based costing through a small example

1. Cost
Accounting
Project
Submitted By: Chaitanya , Gautam,
Preeti , Sangeeta , Sarvesh , Swati

2. Traditional costing Vs ABC
2

3. Case Details
• The following information
provides details of the cost,
volume and transaction cost
drivers for the year 2019 in
respect of NEVO ltd.
NEVO Ltd.
Product X (Water bottle)
Product Y (Tiffin)
Product Z (School bag)
3

4. Provided Production Details
Product X Product Y Product Z Total
Production and
sales (units)
30000 20000 8000 58000
Raw materials
consumption
(units )
5 5 11 21
Direct material
cost per unit (Rs.)
25.00 20.00 11.00 56.00
Direct labour
hours
4/3 2 1 4.33
Machine hours 4/3 1 2 4.33
Direct labour
costs (Rs.)
8.00 12.00 6.00 26.00
4

5. Provided Production Details(Others)
Product X Product Y Product Z Total
No. of Production
Runs
3 7 20 30
No. of Deliveries 9 3 20 32
No. of Receipts
(material)
15 35 220 270
No. of Production
orders
15 10 25 50
5

6. Details of Overhead costs
Overheads Costs incurred in Rs.
Set up costs 30000
Machining costs 760000
Receiving costs 435000
Packing costs 250000
Engineering costs 373000
Total Overheads 1848000
30
760
435
250
373
Costs in '000
Set up Machines Receiving
Packing Engineering
6

7. Problem
• Determine the manufacturing cost per unit of each product using
a) Direct labour hours allocation method of overhead costs
b) Machine hours and material handling based allocation methods of
overhead costs
c) Activity based costing
• Summarize product costs for each of three approaches and reason for
difference in the costs.
7

8. Case Analysis -I
Direct labor hours allocation of Overhead costs
8

9. Direct labor hours
• Total Direct labor hour for all
products=
(30000*4/3)+(20000*2)+(8000*
1) hours
= 88000 labor hours
Now allocating this labor hour
to overhead costs of Rs.
1848000
• Direct labor hour rate
=
=Rs. 21 per hour
9

10. Product cost using direct labor rate for overhead
costs allocation
Product X in Rs. Product Y in Rs. Product Z in Rs.
Direct material
costs
25.00 20.00 11.00
Direct labour costs 8.00 12.00 6.00
PRIME COST 33.00 32.00 17.00 = Direct material
+ Direct labour
cost
Overhead costs 21*4/3 = 28.00 21*2= 42 21*1= 21 Rs. 21 is per hour
labour rate as
calculated
previously
Total
manufacturing
cost
61.00 74.00 38.00 = Prime cost +
Overhead costs
10

11. Case Analysis -II
Machine hours and Material Handling as allocation
of Overhead costs
11

12. Details of Overhead costs
Overheads Costs incurred in Rs.
Set up costs 30000
Machining costs 760000
Receiving costs 435000
Packing costs 250000
Engineering costs 373000
Total Overheads 1848000
30
760
435
250
373
Costs in '000
Set up Machines Receiving
Packing Engineering
12

13. Material Handling & Machine hour rate
• Material Handling rate =
=
=
=35.14% of direct material cost.
• Machine hour rate=
=Rs. 18.59 per hour
=
13

14. Calculating Product Cost
Product X Product Y Product Z
Prime Cost Rs. 33.00 Rs. 32.00 Rs. 17.00 =Direct Material
+Direct Labor
Material Handling
Overheads
35.14% of 25= Rs.
8.79
35.14 % of Rs. 20
= Rs. 7.03
35.14% of Rs. 11=
Rs. 3.87
As calculated in
previous slide
Other overheads
(based on
machine hours )
18.59*4/3= Rs.
24.79
18.59*1 = Rs.
18.59
18.59* 2= Rs.
37.18
As calculated in
previous slide
Total
Manufacturing
cost
Rs. 66.54 Rs. 57.62 Rs. 58.05 = Prime cost +
Mat handling +
Other overheads
14

15. Case Analysis -III
Activity Based Costing
15

16. Cost drivers and Associated costs
Costs Rs. Cost Drivers Per unit cost Calculation (Rs. )
Set up Costs 30000 No. of Production Runs 3+7+20= 30 30000/30= 1000.00
Machine Costs 760000 Machine hours worked 76000 760000/76000=
10.00
Receiving Costs 435000 No. of receipts
(material)
270 435000/270 =
1611.11
Packing Costs 250000 No. of deliveries 32 250000/32=
7812.50
Engineering Costs 373000 No. of Production
orders
50 373000/50=7460.0
0
16

17. Product cost using Activity Based Costing
Product X in Rs. Product Y in Rs. Product Z in Rs.
Prime Cost 33 32 17
Set up costs 1000*3/30000= 0.10 7*1000/20000= 0.35 20*1000/8000=2.50
Machine cost 10*4/3= 13.33 10*1= 10 10*2=20
Receiving costs 1611.11*15/30000=
0.81
1611.11*35/20000=2.
82
1611.11*220/8000=44
.31
Sub total 47.24 45.17 83.81
17

18. Product cost using Activity Based Costing
Product X in Rs. Product Y in Rs. Product Z in Rs.
Sub total 47.24 45.17 83.81
Packing cost 7812.50*9/30000=
2.34
7812.50*3/20000=
1.17
7812.50*20/8000=19.
53
Engineering cost 7460*15/30000= 3.73 7460*10/20000=3.73 7460*25/8000=23.31
Total
manufacturing
cost
53.31 50.07 126.65
18

19. Cost Comparison
Product X Product Y Product Z
Direct Labour 61 74 38
Mat hadling +Mat rate 66.58 57.62 58.05
Abc 53.31 50.07 126.65
Costperunit
19

20. Conclusion
• Prime cost remains constant under different
approaches
• Variation in product cost is due to variation in
allocation of Overheads.
• In ABC system we take activity based overheads
hence price varies as per activity related heads
and expenses.
20

21. Team
1) Chaitanya Dev Sadaphal
2) Preeti Saraswat
3) Gautam Sharma
4) Sangeeta Sahu
5) Sarvesh Pandey
6) Swati Soni Katware