Activity-Based Costing (ABC) Homework

Activity-Based Costing (ABC) Homework

Variable cost Milk Premium

and volume data chocolate cacao

Raw materials 0.50 0.75

Direct labor 0.25 0.40

Selling and general 0.05 0.05

Volume in units 300,000 100,000

Sells price / unit 2.65 4.99

Production hours/unit same same

ABC cost Milk Premium

allocation percentages chocolate cacao

Product development 20% 80%

Setup candy molding

equipment 60% 40%

Equipment operations 75% 25%

Shipment preparation 70% 30%

Distribution 65% 35%

Administration 50% 50%

1. Compute the total overhead, total cost, and per unit cost of each product, under the

simple/traditional costing method and under the Activities-Based Costing (ABC) method.

2. Compute and compare the net operating profit margin of each product using the simple/

traditional costing method and using the ABC method. Evaluate the difference.

3. Categorize the production activities under activity-based costing according to the cost hierarchy

and indicate the type of cost category that aligns with the activity.

4. Write a brief explanation (approximately two paragraphs) that you might deliver to management to

justify the use of ABC for these two products.

ABC Indirect Factory Depreciation: Repairs & Selling and General

Cost manufacturing Insurance

& Machinery maintenance distribution & admin.

Pools labor Utilities & factory factory expenses expenses Totals

Product Development 25,000 25,000

Setup Candy Molding

Equip 12,000 18,500 30,500

Equipment Operations 15,500 31,500 20,000 10,000 77,000

Shipment Preparation 20,000 20,000

Distribution 4,000 4,000

Administration 20,000 60,000 80,000

Totals 52,500 31,500 38,500 14,000 40,000 60,000 236,500