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Activity Based Cost accounting system - Math Problem Example

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Activity Based Costing encourages managers to watch activities or functions that are value added . These are operational acts that help identify the activities or functions that get customers. …
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Download file to see previous pages In this case study, the supporting excel computations show that overhead using the traditional cost accounting procedure resulted only P137,994.00 for Lever, P22,079.04 for Spring, and finally P 16,559.28 for pump products. Total manufacturing cost also under the traditional or old fashioned cost accounting procedure resulted to the usual Direct Materials cost of the products P 510,000.00 for Lever, P163,200.00 for Spring, and P 139,200.00 for Pump. Another accounting cost for resulting from the Traditional Cost Accounting procedure is the Regular item Direct labor of P 2,160,000.00 for Lever, P163,200.00 for Spring and again P16,560.00 for Pump. The total manufacturing cost under the Traditional method is the sum of Direct Materials, Direct labor and Overhead. P2,807,994.00 for Lever, P348,479.04 for Spring, and finally P 172,319.28 for pump products. Under the Activity Based Costing, The first cost driver is called VOLUME DRIVER showing amount of P 286,000.00 for Lever, P45,760.00 for Spring and P 34,320.00 for Pump. Another driver in this systems is the PURCHASING DRIVER. The purchasing cost for Lever products is P 14,810,000.00 and P2,369,600 for Spring and, the last item, P 1,777,200.00 for Pump. The next driver is the SET UP driver. Set up driver cost are P 38,533,000.00 and P 6,165,280.00 for Spring and of course P 4,623,960.00 for the last item, Pump. The cost drivers are higher than the total manufacturing cost of the traditional cost accounting system. In this new system, the cost factors can easily be traced to determine what the effects of these costs are to over all manufacturing operations. Some cost activities that will not help in the manufacturing process but sometimes, their costs are included in the factory cost of production in error. The Purchasing cost driver will display if the inventory cost is too high or too low or even unnoticed thus affecting the decision making process of management.

Traditional Cost Accounting

Direct Materials

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