Activity-Based Costing

Activity-Based Costing

ADVANTAGES DISADVANTAGES

Improves over Reduction is not

all processes always possible

High
Waste is
implementation
identified
costs

Pricing is better
Time involved
organized

Can be applied
to the entire Data flaws
business
Application of Activity-Based Costing System in RAK Ceramics

Step 01:Activity Cost Pools at RAK Ceramics

1.Customer Orders
2.Product Design
3.Order size
4.Customer Relation
5.Others
 Step 02:Assign Overhead Cost to Activity Cost Pools
Production Department

Repairs and indirect materials 641,686,088

Depreciation 336,849,058

Royalty and technical know-how fees 81,547,008

Factory Utilities 531,346,587

Total 1591,428,741

General Administrative Department

Wages and Salaries 201,738,233

Office Equipment Depreciation 49,517,177

Office Rent and Maintenance 17,598,343

Utility Bills 63,741,091

Total 332,594,844

Marketing Department

Salaries and Bonus 289,451,279

Selling Expenses 410,100,486

Total 699,551,760
 Distribution of Resource Consumption
Activity Cost Pools of RAK Ceramics

Customer Order Product Design Order Size Customer Relation Others Total's
Production Department

Repairs and indirect materials 25% 40% 20% 10% 5% 100%

Depreciation 20% 0% 60% 0% 20% 100%
Royalty and technical know-how fees 20% 45% 25% 5% 5% 100%
Factory Utilities 0% 10% 50% 0% 40% 100%

General Admistrative Department

Wages and Salaries 15% 5% 10% 30% 40% 100%

Office Equipment Depreciation 30% 0% 0% 25% 45% 100%
Utility Bills 0% 10% 50% 0% 40% 100%
Administrative Bulding Rent 0% 0% 0% 0% 0% 100%
Marketing Department

Wages and Salaries 20% 10% 0% 60% 10% 100%

Selling Expense 10% 0% 0% 70% 20% 100%
 First-Stage Allocations to Activity Cost Pools
First Stage Allocation to Activity Cost Pools

Customer Order Product Design Order Size Customer Relation Others Total's
Production Department

Repairs and indirect materials 160421522 256674435 128337218 64,168,609 32084304 641686088
Depreciation 67369812 0 202109435 0 67369812 336849058
Royalty and technical know-how fees 16309402 36696153 20386752 4077350 4077350 81547008
Factory Utilities 0 53134659 265673294 0 212538635 531346587

General Admistrative Department

Wages and Salaries 30260735 10086912 20173823 60521470 80695293 201738233

Office Equipment Depreciation 14855153 0 0 12379294 22282730 49517177
Utility Bills 0 6374109 31870546 0 25496436 63741091
Administrative Rent 17598343 17598343

Marketing Department
Wages and Salaries 57890256 28945128 0 173670767 28945128 289451279
Selling Expense 41010049 0 0 287070340 82020097 410100486
Total 388116928 391911396 668551068 601,887,830 573108129 2623575350
 Step 03:Calculate Activity Rates

Overhead Costs
(Manufacturing and Nonmanufacturing)

First-Stage Allocations

Customer Product Order Size Customer Other

Orders Design Relations
388,116,928 391,911,396 668,551,068 601,887,830 573,108,129

Second-Stage Allocations
600
970292 8000 80000
Custom
Orders Design MHS
ers

400 48989 8357 955180 Not Allocated

Step 04: Assign Overhead Costs to Cost Objects

Overhead Cost for the Ceramics Wall Tiles

Activity Cost Pool Activity Rate(A) Activity (B) ABC Cost(A)(B)

Customer Orders 400 582175 232,800,000

Product Design 48989 250 12247250

Order Size 8356.88 50000 417844000

Overhead Cost for the Sanitary Ware

Activity Cost Pool Activity Rate(A) Activity (B) ABC Cost(A)(B)

Customer Orders 400 388117 155246800

Product Design 48989 150 7348350

Order Size 8356.88 30000 250706400

Step 5: Prepare Management Report

Product Margin for Ceramic Wall Tiles Product Margin for Sanitary Ware
Particulars Tk. Total Particulars Tk. Total

Sales 3,396,846,947 Sales 2,264,564,631

Costs: Costs
Direct Materials 859,855,828 Direct Materials 418,480,315
Direct Labor 266,984,247 Direct Labor 177,989,498
Shipping 8832807 Shipping 5,888,538
Customer Order 232,800,000 Customer Order 155246800
Product Design 12247250 Product Design 7348350
Order Size 417844000 Order Size 250706400
Total Cost 1,798,564,132 Total Cost 1,015,659,901
Product Margin 1,598,282,815 Product Margin 1,248,904,730