Activity Based Costing

Question 1

Steps of current method/traditional costing

Answer 1

1. Don’t know labour hours per unit then- (direct activity/£ per hour) x per activity time
2. Then total budgeted activity = budgeted production units x above answer
3. Otherwise do- production units x machine hours = total budgeted activity
4. Total budgeted fixed overhead = all indirect production costs
5. OAR= total budgeted fixed overhead/ total budgeted activity

Question 2

Layout of final table for traditional costing

Answer 2

A             B             C
DM
DL
OH           OAR   X  answer to first question 
TOTAL

Question 3

Steps for ABC method

Answer 3

1. Cost drivers- production units/batch size= n of batches. N of batches x purchase order of batch= no of orders. Machine hours x sales volume= total machine hours (may already be in question)- include totals
2. Cost driver rate=indirect production cost/ total cost driver
3. Cost driver x cost driver rate for each cost pool. Add all up for A B C and do total column. Divide by sales volume to give OH cost per unit

Question 4

Prime cost is

Answer 4

DL+ DM x units

• added before dividing by sales volume to give OH cost per unit

Question 5

Standard costs equation for traditional method

Answer 5

DE + DM + DL + OH

Question 6

Standard cost equation for ABC method

Answer 6

DL + DE + DM