Question

Please briefly explain the activity-based costing income statement and provide a hypothetical example of activity-based costing income statement in a manufacturing enterprise

Answer 1

Answer to the above question:

Activity based costing is a type of costing method which identifies various activities in an organisation and assigns the cost of each activity to the products and/ services on the basis of various activities and resource usage.

Steps to be followed:

Step 1) identification of activities involve in production process.

Step 2) classification of each identified activity.

Step 3) identification and accumulation of total cost of each activity.

Step 4) identification of the cost driver for each activity.

Step 5) calculation of total units of the cost driver relevant to each cost activity.

Step 6) calculation of activity rate.

Step 7) application of the cost of each activity to products based on its activity usage by the product.

Hypothetical example of activity based costing income statement in a manufacturing Enterprise:

To find out the amount spend on utilities to create a product.

Let the total utility bill is $50,000 for the year.

Let the total direct labour hours worked be 2,500 hours for the year.

Therefore, cost driver rate = total utility bill/ number of hours worked

= $50,000/2500 hours

= $20/ hour

For this particular product, if utilities used for 5 hours then Multiply the hours by the cost driver rate of $20 to get $100.