Cooplan Manufacturing: Page 24-25 Text

ABSORPTION COSTING
W

Output units
Selling price

10
$120

10
$330

100
$120

100
$330

Material cost per unit

Direct material cost

$20
$200

$80
$800

$20
$2,000

$80
$8,000

1
$5
10
$50

3
$5
30
$150

1
$5
100
$500

3
$5
300
$1,500

$70
$700

$70
$2,100

$70
$7,000

$70
$21,000

$950

$3,050

$9,500

$30,500

$95

$305

$95

$305

Direct labour hours per unit

Direct labour cost per hour
Total direct labour hours
Direct labour cost
Overhead absorption rate (per direct
labour or machine hour)
Absorbed overhead each type of produ
Total production cost
Cost per unit

ACTIVITY-BASED COSTING
W

Output units
Direct material cost
Direct labour cost

10
$200
$50

10
$800
$150

100
$2,000
$500

100
$8,000
$1,500

10
$7
$70

30
$7
$210

100
$7
$700

300
$7
$2,100

Set-up costs
Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$780
$1,560

2
$780
$1,560

5
$780
$3,900

5
$780
$3,900

Production and schedulling costs

Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$650
$1,300

2
$650
$1,300

5
$650
$3,250

5
$650
$3,250

Short-run variable overheads

Cost driver: machine hour
Cost per cost driver
Activity cost allocated

Material handling costs

Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$550
$1,100

2
$550
$1,100

5
$550
$2,750

5
$550
$2,750

$4,280

$5,120

$13,100

$21,500

$428

$512

$131

$215

$95
$333

$305
$207

$95
$36

$305
-$90

Total production cost

Cost per unit

Absorption costing - Cost per unit

Difference

Under-allocates overhead costs to low volume products (W, X), Over-allocates overhead costs to high

ABC vs. Absorption Costing

600
512
500

428

400
Unit cost

330

300

330

305

305
215

200
120
100

120

95

95

131

0
W

Product

Suggested selling price

Unit cost under Absorption costing

Unit cost under ABC

Total

Note

$11,000 Output units x Material cost per unit

440 Output units x Direct labour hours per unit

$2,200 Direct labour hours per unit x Total direct labour hours

$30,800 Total overhead costs / Total direct labour hours

$30,800 Total direct labour hours x OAR
$44,000

Total

$11,000
$2,200
$3,080
440
$3,080
$10,920
14
$10,920
$9,100
14
$9,100

$7,700
14
$7,700
$44,000

overhead costs to high volume products (Y, Z)

330

305
215

under ABC

Cooplan Manufacturing: Page 24-25 Text

ABSORPTION COSTING
W

Output units
Selling price

10
$120

10
$330

100
$120

100
$330

Material cost per unit

Direct material cost

$20
$200

$80
$800

$20
$2,000

$80
$8,000

1
$5
10
$50

3
$5
30
$150

1
$5
100
$500

3
$5
300
$1,500

70
$700

70
$2,100

70
$7,000

70
$21,000

$950

$3,050

$9,500

$30,500

$95

$305

$95

$305

Direct labour hours per unit

Direct labour cost per hour
Total direct labour hours
Direct labour cost
Overhead absorption rate (per direct
labour or machine hour)
Absorbed overhead each product
Total production cost
Cost per unit

ACTIVITY-BASED COSTING
W

Output units
Direct material cost
Direct labour cost

10
$200
$50

10
$800
$150

100
$2,000
$500

100
$8,000
$1,500

10
$7
$70

30
$7
$210

100
$7
$700

300
$7
$2,100

Set-up costs
Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$780
$1,560

2
$780
$1,560

5
$780
$3,900

5
$780
$3,900

Production and schedulling costs

Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$650
$1,300

2
$650
$1,300

5
$650
$3,250

5
$650
$3,250

Short-run variable overheads

Cost driver: machine hour
Cost per cost driver
Activity cost allocated

Material handling costs

Cost driver: Production runs
Cost per cost driver
Activity cost allocated

2
$550
$1,100

2
$550
$1,100

5
$550
$2,750

5
$550
$2,750

$4,280

$5,120

$13,100

$21,500

$428

$512

$131

$215

Total production cost

Cost per unit

Under-allocates overhead costs to low volume products (W, X), Over-allocates overhead costs to high

ABC vs. Absorption Costing

600
512
500

428

400
Unit cost

330

300

330

305

305
215

200
120
100

120

95

95

131

0
W

Product

Suggested selling price

Unit cost under Absorption costing

Unit cost under ABC

Total

Note

$11,000 Output units x Material cost per unit

440 Output units x Direct labour hours per unit

$2,200 Direct labour hours per unit x Total direct labour hours

Total overhead costs / Total direct labour hours

$30,800 Total direct labour hours x OAR
$44,000

Total

$11,000
$2,200
$3,080
440
$3,080
$10,920
14
$10,920
$9,100
14
$9,100

$7,700
14
$7,700
$44,000

overhead costs to high volume products (Y, Z)

330

305
215

under ABC