Activity-Based Costing and Management
Date: July 29, 2013
To: Rubrics Corporation
From: Group 1
RE: Activity-Based Costing and Management
Objective and Purpose
It is said that Rubrics Corporation is no longer satisfied with single direct cost driver, which is also called Traditional Volume-Based Product-Costing System, because it is not accurate. A shortcoming or overloading of cost occurs when they use Traditional Volume-Based Product-Costing System to calculate cost of producing four products: Widgets, Gadgets, Smidgets, and Smadgets. To solve this problem, we calculated by using both traditional method and Activity-Based Costing method. It is followed by analysis of different methods’ application, advantages and disadvantages.
The results of Traditional Costing and Activity-Based Costing
Traditional Costing method: Take Widgets as an example, summing given direct labor 100,000, direct material 100,000 and overhead cost 200,000 (it is given that overhead cost equals to 200% of direct labor), we can get the total cost of Widgets is 400,000. By using same formula we can get the total costs of Gadgets, Smidgets, and Smadgets are 1,100,000, 1,350,000, and 850,000.
Activity-Based Costing method: Again, we take Widgets as an example, activity cost pool of depreciation, set-up, and rent are 300,000, 700,000, and 1,000,000. They are respectively devided by 3,000 machine hours, 1,000 set-up hours, 100,000 square feet. And thus we can get pool rate of 100, 700 and 10. Due to Widgets needs 500 machine hours, 200 set-up hours, and 20,000 square feet. We multiply each pool rate respectively with each unit requirement. We can get depreciation cost, set-up cost, and rent costs are 50,000, 140,000, and 200,000. The total of three numbers is the overhead cost of Widgets that is 390,000. By using same calculating method we can get the overhead cost of Gadgets, Smidgets, and Smadgets are 600,000, 210,000, and 800,000.
By using traditional cost, company only can calculate approximately cost, which will fail to
To: Rubrics Corporation
From: Group 1
RE: Activity-Based Costing and Management
Objective and Purpose
It is said that Rubrics Corporation is no longer satisfied with single direct cost driver, which is also called Traditional Volume-Based Product-Costing System, because it is not accurate. A shortcoming or overloading of cost occurs when they use Traditional Volume-Based Product-Costing System to calculate cost of producing four products: Widgets, Gadgets, Smidgets, and Smadgets. To solve this problem, we calculated by using both traditional method and Activity-Based Costing method. It is followed by analysis of different methods’ application, advantages and disadvantages.
The results of Traditional Costing and Activity-Based Costing
Traditional Costing method: Take Widgets as an example, summing given direct labor 100,000, direct material 100,000 and overhead cost 200,000 (it is given that overhead cost equals to 200% of direct labor), we can get the total cost of Widgets is 400,000. By using same formula we can get the total costs of Gadgets, Smidgets, and Smadgets are 1,100,000, 1,350,000, and 850,000.
Activity-Based Costing method: Again, we take Widgets as an example, activity cost pool of depreciation, set-up, and rent are 300,000, 700,000, and 1,000,000. They are respectively devided by 3,000 machine hours, 1,000 set-up hours, 100,000 square feet. And thus we can get pool rate of 100, 700 and 10. Due to Widgets needs 500 machine hours, 200 set-up hours, and 20,000 square feet. We multiply each pool rate respectively with each unit requirement. We can get depreciation cost, set-up cost, and rent costs are 50,000, 140,000, and 200,000. The total of three numbers is the overhead cost of Widgets that is 390,000. By using same calculating method we can get the overhead cost of Gadgets, Smidgets, and Smadgets are 600,000, 210,000, and 800,000.
By using traditional cost, company only can calculate approximately cost, which will fail to