Activity Based Costing

June 2021

Philip Dunn tests your knowledge of Activity Based Costing (ABC).

Q1: In Activity Based Costing terminology to what does the following definition refer: ‘a value adding process which consumes resources’?

Q2: In Activity Based Costing terminology to what does the following definition refer: ‘an activity or factor that generates cost’?

Q3: In Activity Based Costing terminology to what does the following definition refer: ‘pooling of overhead cost which relates to a specific activity’?

Q4: In Activity Based Costing terminology to what does the following definition refer: ‘the product of dividing the cost pool for an activity by the cost driver volume’?

Mini case study

Rod Craft manufactures sea fishing rods and the accountant and production manager have recently analysed and identified various activities, cost drivers and current cross driver volume across the production unit.

Budget for Quarter Ended 30 June 2020

Activity	Cost Pool (£)	Cost Driver Volume
Process Set Up	40,000	100 Set ups
Material Procurement	10,000	40 Purchase Orders
Maintenance	12,500	10 Maintenance Plans
Material Handling	25,000	2500 Material Movements
Quality Control	20,500	250 Inspections
Order Processing	14,000	400 Customers
	£122,000

Q5: Calculate the cost pool driver rate per set up

Q6: Calculate the cost pool driver rate per purchase order.

Q7: Calculate the cost pool driver rate per maintenance plan.

Q8: Calculate the cost pool driver rate per material movement.

Q9: Calculate the cost pool driver rate per inspection.

Q10: Calculate the cost pool driver rate per customer.

The business has a number of products, one of which is the Rod Craft 3. In the budget period Quarter Ended 30 June 2020 it plans to produce 1,000 units of Rod Craft 3.

To achieve this output it will require the following:
• 3 Set Ups
• 4 Purchase Orders
• 1 Maintenance Plan
• 150 Material Movements
• 100 Inspections
• 12 Sales Customers Using the ABC principles calculate:

Q11: The amount of overhead recovered for the number of set ups.

Q12: The amount of overhead recovered for the number of purchase orders.

Q13: The amount of overhead recovered for the number of maintenance plans.

Q14: The amount of overhead recovered for the number of material movements.

Q15: The amount of overhead recovered for the number of inspections.

Q16: The amount of overhead recovered for the number of customers.

Q17: The total overhead recovered for the planned production.

Q18: The overhead charge per unit of output.

Each unit of output takes four standard hours of direct labour at £12 per hour and the direct material cost is £30.

Q19: Calculate the production cost of one unit of output.

• Dr Philip E Dunn is a freelance author and technical editor for Kaplan and Osborne Books