The calculator aids businesses in implementing ABC by automating the calculation process, thus ensuring accuracy and reducing the time spent on manual computations.
Formula of Activity-Based Costing Calculator
Steps in Activity-Based Costing Calculator
- Identify Activities: First, delineate all activities that contribute to the production process, from procurement to final assembly.
- Assign Costs to Activities: Next, aggregate the costs associated with each activity. These become the cost pools.
- Identify Cost Drivers: For each activity, identify factors that drive the cost, such as machine hours for machining or square footage for space occupancy.
- Calculate Cost Driver Rate:
- Calculate the rate for each activity:
- Cost Driver Rate = Total Cost of Activity / Total Quantity of Cost Driver
- Assign Costs to Products:
- Allocate costs to products based on their usage of each activity:
- Cost Assigned to Product = Cost Driver Rate * Quantity of Cost Driver Used by Product
- Calculate Total Cost for Each Product:
- Finally, compile the costs from all activities to ascertain the total cost per product:
- Total Cost of Product = Sum (Cost Assigned to Product from each Activity)
Table for General Terms and Calculations
This table explains key terms related to Activity-Based Costing (ABC) and their importance in the ABC calculation process:
| Term | Definition | Example Usage |
|---|---|---|
| Cost Pool | Total costs of activities grouped together because they are related to the same process or function. | Costs associated with different manufacturing departments like machining, assembly, etc. |
| Cost Driver | A factor that causes the cost of an activity to increase or decrease. | Machine hours for machining or square footage for space occupancy are common cost drivers. |
| Cost Driver Rate | The rate at which costs are allocated to products based on the activity's cost driver. | Calculated by dividing the total cost of an activity by the total quantity of the cost driver. |
| Activity | Any procedure or task with a measureable consumption of resources. | Procurement, manufacturing, quality control, etc., are typical activities in a production process. |
| Total Cost of Activity | The aggregate cost tied to a specific activity, calculated over a certain period. | Total cost of the quality control department for one month. |
| Quantity of Cost Driver | The total amount of the cost driver consumed. | Total machine hours used in a month. |
| Cost Assigned to Product | The portion of costs allocated to a product based on its usage of activities. | Total costs assigned to a product based on the number of machine hours it required. |
Example of Activity-Based Costing Calculator
Scenario:
A manufacturing company wants to calculate the activity-based costs for its two products, Product A and Product B. The company has identified three major activities: Procurement, Assembly, and Quality Control.
Cost and Activity Data:
- Procurement Costs: $30,000
- Assembly Costs: $50,000
- Quality Control Costs: $20,000
- Procurement Driver (Purchase Orders): 150 orders (Product A: 100, Product B: 50)
- Assembly Driver (Machine Hours): 2,000 hours (Product A: 1,200, Product B: 800)
- Quality Control Driver (Inspection Hours): 500 hours (Product A: 300, Product B: 200)
Steps to Calculate:
- Calculate Cost Driver Rates:
- Procurement Rate = $30,000 / 150 orders = $200 per order
- Assembly Rate = $50,000 / 2,000 machine hours = $25 per hour
- Quality Control Rate = $20,000 / 500 inspection hours = $40 per hour
- Assign Costs to Products:
- Product A:
- Procurement: $200 x 100 orders = $20,000
- Assembly: $25 x 1,200 hours = $30,000
- Quality Control: $40 x 300 hours = $12,000
- Total Cost for Product A = $20,000 + $30,000 + $12,000 = $62,000
- Product B:
- Procurement: $200 x 50 orders = $10,000
- Assembly: $25 x 800 hours = $20,000
- Quality Control: $40 x 200 hours = $8,000
- Total Cost for Product B = $10,000 + $20,000 + $8,000 = $38,000
- Product A:
Conclusion:
Using the ABC method, Product A has a total allocated cost of $62,000, and Product B has a total of $38,000. This detailed cost allocation helps the company understand the true cost of each product and make informed pricing and production decisions.
Most Common FAQs
ABC provides a more accurate reflection of the costs associated with specific products and services, particularly in complex environments where overheads are significant.
While ABC is resource-intensive, it can offer valuable insights for small businesses looking to scale operations or refine their product pricing strategies.