Case Study: Activity-Based Costing

Executive Summary:

This report is about the evaluation of two cases, first case is about activity based costing and the second one is about Budgeting. In the first case evaluation of US bright product company which is manufacture of cakes and pastries is to be done. The evaluation is regarding the allocation of cost on the basis of cost drivers. The cost per unit is calculated by dividing the overall cost or we can say total cost from the annual production quantity. Activity based costing elaborates the relationship between activities, cost and products.

In this case the three parts need to be evaluated in first part per unit cost needs to be calculated based on the activity cost drivers. In the second part the billing amount needs to be calculated

(Activity Based Costing)

Introduction:

Activity Based costing is the method of accounting that identifies the activities that are performed by the firm and then allocate the cost on the basis of the activities performed by the firm. ABC costing system is usually used in most of the manufacturing companies as it enhances the cost classification and made the allocation of indirect easy (Heisinger, 2009). ABC Costing system is used in product costing, customer profitability analysis and target costing.

This present case is about the US Bright product company which produces cakes and pastries. They use Activity Based Costing as their costing system. In the first part they need to know the product cost on the basis of allocating the cost to the cost drivers. In the second part they want the billing amount as well as per unit cost of producing cakes and pastries of Lamington. Lastly the additional cost need to be determined which can be added in the product cost to arrive at the total cost of Lamington.

Part (a) Cost per unit of activity

The cost is allocated as per the cost drives according to the nature of the cost. The Activity Based Costing is used to allocate the cost to the cost drivers.

Part (b) Bill of Activities

In this part the schedule of bill of activities in prepared for the Limington the batch size of Lamington is 1000 and the annual production volume is 100000. Further the cost per unit is also calculated as per ABC costing. The cost per unit is calculated by dividing total cost from annual production. The cost is calculated for estimating the hike in annual production. The total cost is calculated by adding all the costs which are derived by multiplying the costs to the cost drivers.

Bill of activities

Activity Consumed Annual Quantity of Activity Driver Cost per Unit Total Cost

Process Receivables 500 3.00 1,500.00

Process payables 200 10.00 2,000.00

Program production 100 28.00 2,800.00

Process Sales Order 400 10.00 4,000.00

Load Mixers 100 14.05