Costing and Traditional Costing Essay Example | Topics and Well Written Essays - 2750 words

Costing and Traditional Costing - Essay Example Activity based costing affects only overhead costs i.e. direct labour and direct materials are the same under Absorption Costing Method. A single activity pool of cost is referred to as a â€Å"cost bucket† where cost outlays for a specific activity are garnered. A measure for an activity is applied as a basis for allocation while using overhead costs. A rate of activity rate refers to the predetermined rate of overhead in Activity based costing. Activities’ Hierarchy: Guides the way costs are supposed to be grouped into various pools as well as the nature activities assigned per given cost pool Unit-level activities – done every moment a unit is produced. Batch- level activities – performed each time a batch is processed. Product- level activities – must be done regardless of the number units or batches of the output are being manufactured. Facility-level activities- have to be done regardless of the products to be produced. Task 1 Full costing and Activity based costing A) Calculations using Full costing Revenue and direct costs of products Skel Foss Total Units produced and sold 15000 units 18000 units 33000 Selling price/unit 52 91 Direct labour cost/unit (2hrs*10=20) (5hrs*10=50) Direct Material cost/unit 25 30 Sales revenue (1*2) 780000 1638000 2418000 Direct labour cost (1*3) 300000 900000 1200000 Direct Materials cost (1*4) 375000 540000 915000 Total direct cost (6+7) 675000 1440000 2115000 Calculations on Overheads and indirect costs. Indirect component Products (Skel + Foss) % of Total products Bought in parts handling costs 96000 40% Materials handling costs 38000 15.83% Sales invoicing costs 20000 8.33% Machine set up costs 26000 10.84% All other overheads 60000 25%... The paper tells that costs objects take in activities and activities take in resources. Resource cost outlays are allocated to activities based upon their utilisation of the mentioned resources, while activity cost outlays are allocated to cost outputs with the basis being cost objects in proportion to utilisation of those activities. Activity based costing puts into account causal relationship between costs and activities and between activities and resources. Using activity based costing management technique can considerably improve the financial health of a firm as it presents the real picture or the factsheet, as the activity based costing technique tracks the cost objects utilized in the activities and, thus, the factors consumed in the same activities, to determine correct individual overheads instead of simply linking on the volume. The activity based costing concept as a costing technique takes into consideration both factors. That is, the activity drivers as well as the resou rce drivers to come up with the product’s price or service. It is essential to realize that the profitability of a firm not only relies on the sales of the service or product, but also on the expenses concerned in the making of that specific service or product. In a given case study of parts of an automotive manufacturing firm located in the nation by the name Norway, it was then proven that just a minute portion of their line of products had a positive economic profit as well as return upon sales. As a matter of fact when the economic profit and operational profitability of their line of products were classified and columned side by side, that was an eye opener.