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# Activity based costing (Example)

## Document Preview:

Student’s Name Course Professor Date Simple and ABC Accounting In modern day world characterized by massive industrialization managers strive to allocate cost effectively so that they harmonize cost and prices to achieve sufficient growth in their industries. However there are basically two approaches in cost computation. First Is the simple cost system which is a traditional one and second is the activity based cost system which is mostly used in the modern world. Cost allocation is essential in decision making evaluation of resources and in provision of full cost information. There are various processes and steps in allocation of resources which involves various production departments. This leads to distinct classification of costs varying from direct costs to indirect costs consequently leading to grouping of costs No. of purchase order =100 . Cost of purchase order \$3600. Total cost =100× \$3600 =\$ 360000 Cutting cost - Set up cost Set up hours = 2 Set up cost = \$ 9 000 \$18 000 Production cost Production machine hours = 1 Cost of production = \$15 000 \$15 000 Marketing cost 5% of \$4237 \$ 211.85 Administration cost - \$1600 total \$395311.85 Overhead per unit \$1976.55925 Step two involves the following: Activity based cost system: Male life jackets Female life jackets Kid life jacket total Cost of supply \$16 \$12 \$7 Direct labor cost \$15 \$10 \$10 manufacturing overhead \$1918.01975 = \$28770.29625 \$1930.891 = \$19308.91 \$1976.55925 = \$19765.5925 \$28801.29625 \$19330.91 \$19782.5925 \$67914.79875 The standard cost using activity based cost system is 67914.79875 [...]

## Order Description:

Zortan Corporation is a small company that manufactures life jackets for adults and children. The company has an adult male life jacket, an adult female life jacket and one kid life jacket. The company uses the job costing system to keep track of their manufacturing costs. Their job cost system uses two direct control accounts: direct material and direct labor and one single indirect cost pool. The company is working at total capacity and uses machine hours as their allocation base for all indirect costs. A new company has come into the life jackets market, Lifemart, with lower unit price and flashy new colors, so Zortan management are interested in making sure their product costs are accurate to be able to compete with the new competition. In an effort to make their cost system better the company is thinking to implement an ABC cost system. The ABC system instead of having a single indirect cost pool it will have seven different indirect cost categories: design, purchasing, cutting, setup, production, marketing and administration. Below the information from their 2016 production Male Female Kid Total Number of life jackets jobs 600 350 200 Price per job \$90 \$65 \$40 Cost of supplies per job \$16 \$12 \$7 Direct labor cost per job \$15 \$10 \$10 Production machine hours per job 1.5 1 1 Cost of production \$15,000 Indirect cost increases with production machine hours Setup hours per job 5 3 2 Setup cost \$9,000 Indirect setup cost increases with setup hours Total number of purchase orders 300 175 100 Purchase order cost \$3,600 indirect purchase order cost increases with number of purchase orders Design costs \$1,500 \$2,000 \$500 \$4,000 Design costs are allocated To jobs based on a special study Marketing cost as percentage of 5% 5% 5% \$4,237 revenue Administrative costs \$4,800 Demand for administrative resources increases with direct labor costs 1. Calculate the cost of a standard job for each category of life jacket under a simple costing system. 2. Calculate the cost of a standard job for each category of life jacket under the activity based costing system.

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Words 825

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Expert Greeny24

## Client Review

Good job!!!

Positive
04.28.2017

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