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# Activity Based Costing - Essay Example

## Extract of sample Activity Based Costing

More than that, it traces back the cost to the activities and processes (Heisinger, 2010). Above all, use of activity based costing (ABC) method especially in companies with diverse centers and distribution channels has proven to be suitable. Unlike other methods, the activity based costing (ABC) method ensures that there exists a direct correlation between the related overhead costs and the occurrence of an activity (Chang, 2010). Without doubt, the marketing manager decision to use the activity based costing (ABC) method, as a way of critically analyzing the customer support and distribution costs is more suitable, as compared to taking the store with the highest contribution margin ratio....
Without doubt, the marketing manager decision to use the activity based costing (ABC) method, as a way of critically analyzing the customer support and distribution costs is more suitable, as compared to taking the store with the highest contribution margin ratio. Workings Cost allocation based on revenue Total revenue is \$ 500,000 1) Department Stores = \$150,000/ \$500,000 = 0.3 2) Specialty Shops = \$100,000/ 500,000 = 0.2 3) Gift Shops = \$250,000/500,000 = 0.5 (Bragg, 2002) i) Variable production cost is \$150,000 Department Stores = \$150,000 * 0.3= \$45,000 Specialty Shops = \$150,000 * 0.2 = \$ 30,000 Gift Shops = \$150,000 * 0.5 = \$ 75,000 ii) Production Overhead \$120,000 Department Stores = \$120,000 * 0.3= \$36,000 Specialty Shops = \$120,000 * 0.2 = \$ 24,000 Gift Shops = \$120,000 * 0.5 = \$ 60,000 iii) Selling & Distribution Costs \$180,000 Department Stores = \$180,000 * 0.3= \$54,000 Specialty Shops = \$180,000 * 0.2 = \$ 36,000 Gift Shops = \$180,000 * 0.5 = \$ 90,000 Activity Based Costing (ABC). Total costs/No of orders places \$40,000 10 90 900 Cost drive is the number of orders placed Department Stores = \$40,000 * 10/1000= \$400 Specialty Shops = \$40,000 * 90/1000 = \$ 3,600 Gift Shops = \$40,000 * 900/1000 = \$ 36,000 (Finkler, Ward & Baker, 2007) Total costs/No of sales calls 80,000 5 195 800 Cost drive is the number of sales calls Department Stores = \$80,000 * 5/1000= \$400 Specialty Shops = \$80,000 * 195/1000 = \$ 15,600 Gift Shops = \$80,000 * 800/1000 = \$ 64,000 Total costs/No of shipments 60,000 20 480 1,000 Department Stores = \$60,000 * 20/1500= \$800 Specialty Shops = \$60,000 * 480/1500 = \$ 19,200 Gift Shops = \$60,000 * 1000/1500 = \$ 40,000 Allocation of other costs is based on the ...Show more

## Summary

Based on the activity based costing (ABC) method, the company should increase the number of department stores, as part of its expansion strategy (Chakraborty, 2004)…
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