ABSORPTION COSTING

Difference Between Absorption Costing & Activitiy Based Costing

Difference Between Absorption Costing & Activitiy Based Costing

Activity based costing technique

The Activity based costing is a method which assigns the cost to the activities first and then assigns the cost to products with respect to the activities. (Hicks 1999, Pp. 11-46)The basic philosophy behind the activity based costing is that every product uses and consumes resources and activities.The activity-based costing involves the following four steps:

Identification of activities (such as order processing) that allocate costs and consume resources.

Identification of the cost drivers associated with each activity. A cost driver leads or causes the costs of an activity.

Computes a cost rate (rate) per unit or transaction cost of driving. The rate of conduction of cost may be the cost per order.

Assign costs to products conduction rate by multiplying the cost per unit volume cost drivers consumed by the product.

About the company

Menard, Inc is Trade Network, the largest on the planet to sell tools for the repair and building materials. The company's headquarters is located in the Vinings (Ga.). The company employs three thousand fifty five people. Network operates 2.144 stores in the U.K, U.S., Canada, Mexico and China (Baker 1998, 54).

Menard, Inc offers a vast network to attract the best talent. The company uses the purchase and collection methods of the diversity and improves the application pool and the quality of hiring decisions. Recruitment strategy used in a developing country and institutions, are potential sources of qualified workers partnerships. Committed to working with the Housing Department and the AARP found at the Bureau of Labor members of AARP and other opportunities to work who are important to look for work.

Market Competitors

Following are the major competitors which are giving competition to share the market share.

About Activity Based Costing

The ABC allows greater accuracy in the allocation of corporate costs and allows them to view activity. "It's what makes a company , how time is consumed and the outputs of the process , i.e. transform resources ( materials , labor, technology ) into outputs. " Other ideas from other authors point to the activity as action or set of actions that are performed in the company to obtain a good or service (Charles 2003, 119).

Activity based costing

Activity Based Costing Practical Example

Manufacturing overhead

$5,00,000

Selling and administrative overhead

$300,000

Total overhead costs

$8,00,000

Followings are the activity measures, and activity cost pools that are explained below:

Activity Cost Pool

Activity Measures

Assembling units

Number of units

Processing orders

Number of orders

Supporting customers

Number of customers

Other

Not applicable

Distribution of Resource Consumption Across Activity Cost Pools

 

Assembling Units

Processing Orders

Supporting Customers

Other

Total

Manufacturing overhead cost

51%

34%

6%

11%

100%

administrative and Selling overhead

11%

46%

26%

15%

100%

Total activity

1,100 units

250 orders

125 customers

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Solution:

The allocation of the first-stage cost to the activity cost pools is presented below:

Activity Cost Pools

 

Processing Orders

Other

Supporting Customers

Assembling Units

Total

Manufacturing overhead

$155,000

$45,000

$30,000

$225,000

$600,000

Selling and administrative overhead

165,000

65,000

70,000

75,000

150,000

Total activity

$320,000

$110,000

 $100,000

$300,000

$750,000

The rates for each activity in the ABC for Activity cost pools are given below:

Activity Cost Pools

Total Activity

Total Cost

Activity Rate

Supporting the customers

100 customers

$150,000

$1,500 per customer

Processing the orders

200 units

$300,000

$1,500 per order

Assembling the units

1,000 units

$250,000

$250 per unit

The total overhead cost for the 4 ...