Activity-Based vs Traditional Costing
Assume the Busy Ball Company makes two types of bouncy balls; one has a tube-shaped center and the other has a solid center. The same equipment is used to produce the balls in diametrical runs. Betwixt batches, the equipment is cleaned, maintained, and set leading in the strait-laced configuration for the future quite a little. The hollow center balls are packaged with two balls per package, and the solid center balls are packaged one per package. During the year, Drudging Ball expects to make 1,000,000 hollow centerfield balls and 2,000,000 solid center balls. The overhead costs incurred take in been allocated to activity pools as follows:
By analyzing the activity pools, the accountants and yield managers have known the price drivers, estimated the total expected units for each product, and calculated the whole cost for to each one toll driver.
The activity aside product is shown in the following table.
To calculate the per unit smash costs under ABC's, the costs allotted to each product are divided by the number of units produced. In that case, the unit toll for a vasiform center ball is $0.52 and the unit cost for a solid center ball is $0.44.
Under the traditional method of allocating disk overhead based on calculate labor dollars, the total costs for all balls would be partitioned off by total direct labor dollars for all balls to determine the per unit be. Estimated direct labor costs for the year are $1,512,000, of which $378,000 is for hollow center balls and $1,134,000 is for undiversified center balls. The per unit direct labor costs are $0.38 for hollow center balls ($378,000 ÷ 1,000,000) and $0.57 for solid center balls ($1,134,000 ÷ 2,000,000). The per unit toll to produce balls is measured in ii steps:
- Calculate the preset overhead order past dividing add overhead costs by total direct labor dollars.
- Allocate overhead to each type of product by multiplying the overhead monetary value per direct labor dollar by the per unit direct labor dollars for excavate center balls and for solid center balls.
A compare of the elevated per unit calculated using the ABC and traditional methods often shows very different results:
In this example, the overhead negatively charged to the hollow ballock using ABC is $0.52 and much higher than the $0.35 calculated under the traditional method. The $0.52 is a more accurate cost for making decisions or so pricing and production. For the solid center ball, the smash calculated is $0.44 per social unit using the First rudiment method acting and $0.53 per unit using the traditional method. The reason for the differences is the traditional method determines the cost assignation using direct labor dollars only when, so a mathematical product with high direct labor dollars gets allocated more of the overhead costs than a ware with low candid labor dollars. The number of orders, setups, or tests the product actually uses does not impact the apportioning of overhead costs when related labor dollars are used to allocate overhead.
Rudiment provides a right smart to apportion costs more accurately when overhead costs are not incurred at the aforesaid rank as upfront labor dollars. The more activities identified, the many complex the costing system becomes. Computer systems are needed for complex Alphabet systems. Some companies specify the number of activities utilized in the costing system to keep the system manageable. While this go up may result in some allocations existence arbitrary, victimization ABC does provide a more surgical estimate of costs for usance in making management decisions.
how to calculate product margin under traditional costing system
Source: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/activity-based-costing/activity-based-vs-traditional-costing
