Answer to Question #111093 in Accounting for Stephanie

Question

Harambee Ltd makes three main products, using broadly the same production methods and equipment for all the three products. A conventional product costing system is used at present although activity-based costing (ABC) system is being considered. Details of the three products for a typical period are:

Answer 1

For a typical period are collected all costs for production and divided into 3 products in equal parts.

The application of cost accounting by function or ABC method also has a number of features. The object of cost accounting in this case is a separate type of activity (function, operation), and the object of calculation is the type of product (work, service). The fundamental difference between the ABC method and other methods of cost accounting and calculation is the distribution of overhead costs.Consider the costing algorithm using the ABC method.

First, the main activities of the organization are highlighted - functions or operations. The number of activities depends on its complexity: the more complex the business, the more functions will be allocated. An organization’s overhead is identified with the allocated activities.

For each type of activity, its own cost carrier is determined, which is evaluated in the appropriate units of measurement. In this case, two rules must be observed:

• cost-related data should be easy to obtain;
• measurement of costs through the cost object must correspond to their actual value.

The well-known costing scheme — direct costs plus distributed indirect costs — is transformed with the ABC method. Cost is defined as the cost of direct costs plus the share of indirect (CI) of each type of activity included in the cost of this product. In turn, the share of indirect costs is defined as the product of the cost of the cost driver (Ri) of a given type of activity by its quantitative value (Ki), which is correlated with a particular calculation object.