Activity-Based-Costing - Essay Example

Activity-Based-Costing Question (a) Market analysis Annual cost 050,000 Estimated drivers; 15,000 hrs. Activity-based rate 1,050,000/15,000 = $ 70 per hour Product design Annual cost for product design; $ 2,350,000 Number of designs done annually; 2,500 designs Activity-based rate 2,350,000/2,500= $ 940 per product design Product development Annual cost for product development= $ 3,600,000 Number of products developed annually; 90 products Activity-based rate 3,600,000/90 =$ 40,000 per product development Prototype design Annual cost for prototype test = $ 1,400,000 Annual number of tests= 500 tests Activity-based rate 1,400,000/50 = $ 28,000 per test Question (b) Costing for 1,800hrs market analysis 1,800 X 70 = $ 126,000 Costing for 280 product designs 280 x 940 = $ 263,200 Costing for 10 product development 10 x 40,000 = $ 400,000 Costing for 92 engineering tests 92 x 28,000 = $ 2,576,000 Total cost; 2,576,000 + 400,000 + 263,200 + 126,000 $ 3,265,200 Question (c) Costing for 800hrs marketing analysis 800 x 70 = $ 560,000 Costing for 178 product designs 178 x 940 = $ 167,320 Costing for 3 product development 3 x 40,000 = $ 120,000 Costing for 70 engineering tests 70 x 28,000 = $1,960,000 Total cost; 560,000 + 167,320 + 120,000 + 1,960,000 $ 2,807,320 Question (d) ` Benefits of activity based costing Charging clients on a service or product should be based on calculative figures or else the price of the end product will either low or high.

Costing on the in-house basis will give the management the pricing of the final products. Competitors are always there and pricing of a product has been identified as one element that can be exploited to win certain market segment (Plowman, 2001). In addition, to that activities that consume much cost than others will be identified and process of cost-reduction initiated. With regards to outside companies, using activity-based-cost (ABC) Ideal Manufacturer can decide on the markup for cost incurred in the research and development.

References Plowman, B. (2001). Activity based management improving processes and profitability. Aldershot, Hants, England: Gower.