![]() The main points of difference between activity based costing and traditional costing are given below: 1. Differences between activity based costing and traditional costing: So, the overheads will be allocated at a rate of $2.9 per machine hour spent, $6.5 per labor hour and $50 per production set up. Predetermined overhead rate (production set-ups) = $1,500/30 = $50/hour.Predetermined overhead rate (logistics) = $3,500/540 = $6.5/hour.Predetermined overhead rate (direct supervision) = $1,000/350 = $2.9/hour.If we apply activity based costing, this technique will segregate and identify the most suitable cost driver for the incurred overheads: Activity Therefore, for every labor hour spent, a cost of $6.7 or for every machine hour spent a cost of $10 would be added to the cost of drink. Predetermined overhead rate (machine hours) = $6,000/600 = $10 per machine hour.Predetermined overhead rate (labor hours) = $6,000/900 = $6.7 per direct labor hour.By applying traditional costing, the cost driver for the production of drinks would be based on a single activity level, either labor hours or machine hours, so: These overheads can be segregated into three categories $1,000 for direct supervision for 350 machine hours, $3,500 for logistics for 540 direct labor hours and $1,500 for 30 production set-ups. The direct labor hours estimated for the month of July are 900, direct machine hours are 600 and the estimated overheads are $6,000. manufactures fizzy drinks and plans the production of 20,000 drinks for the month of July. and is used for all the different activities. This single cost driver can be based on machine hours, labor hours etc. In ABC, products are assigned the overhead costs that are supposed to be related to the allocation base.Īctivity based management involves any use of ABC information to support the organization’s strategy, improve operations, or manage activities and their resulting costs.Traditional costing is a costing method used to allocate overhead costs based on a single cost driver according to the consumption of a volume of production resources. Treatment of Costs under Activity Based Costing Understanding this relationship is critical to successful budget management.This consumption of resources is what drives costs.It then assigns the cost of those activities only to the products that are actually demanding the activities. It is a costing system that uses activities to allocate costsĪctivity-based costing assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on a volume basis such as machine hours.Īctivity-based costing first assigns costs to the activities that are the real cause of the overhead cost. The allocations to the departments will be:Īctivity Based Costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs. These overheads are allocated to the department using floor labour hours.īased on this information, the blanket overhead allocation rate is $130 per floor hour, that is $2,6 million/20 000hours The company’s only overheads is $2,6 million of rent expenses. The floor space and floor labour hours is 800m2 and 15 000 hours for Women’s department, 300m hours for the men’s department and 500mhours for the children’s department. There are 3 departments, Women, Men and children. Generally, this method allocates overheads using a single overhead rate, also known as a blanket overhead rate or predetermined rate.įor example making use of direct labour hours, Machine hours, Production units, floor space etc.Ĭonsider this example of Ms PriceCut clothing store. Traditional costing system uses arbitrary methods to allocate overheads to products. ![]() Explain the best steps required in order to conduct an accurate chain survey September 6, 2023ĪCSEE REVIEW QUESTIONS agricultural business agriculture agriculture business all form four past paper auditing and assurance biology chemistry chemistry past paper commerce csee necta questions csee review questions csee review questions pdf english language english language past papers form four topics GEOGRAPHY OF INDIA history history notes history of africa history of South Africa HUMAN GEOGRAPHY kcse KCSE COMMERCE NOTES kcse geography kcse geography revision notes kcse history kcse history notes kcse past papers kcse resources kcse revision notes necta biology necta biology past paper necta chemistry past papers necta csee chemistry past papers necta csee past paper PHYSICAL GEOGRAPHY POPULATION AND DEVELOPMENT population studies PRACTICAL GEOGRAPHY SPACE DYNAMICS AND CLIMATOLOGY STUDY OF SOIL SUSTAINABLE TOURISM TRANSPORT AND COMMUNICATION ZIMSEC FREE NOTES.Describe the processing of gold from the time the ore is lifted to the surface September 6, 2023.Outline four merits of library research September 6, 2023.
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