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Activity based costing profitability
Pages 4 (1004 words)
Under traditional absorption costing method, also known as full costing method, both fixed and variable costs are considered product costs. Specifically, all of the fixed costs are allocated evenly among products
Direct labour and material cost is calculated simply by multiplying the variable cost per unit by number of units. Overheads related to production for each type of product are found as follows:Further on, all the costs acquired, both fixed and variable are summed up to show the full cost of the product. Note that cost per unit is calculated as the full cost divided by a number of units. Profit per unit, clearly shows the profitability of a product although not considering its sales levels, and is evaluated simply subtracting cost per unit from its selling price. The final line, profit takes into account amount of sales and provides the profit of a product as sales - full cost of the product (or by multiplying profit per unit by number of units sold).Activity based costing method assumes that costs are not simply allocated between products. Instead they are bound to activities required to produce and sell the product. Therefore, the first step to completing profitability analysis under activity-based costing is to determine all the activities. In the case of Bingley products they are as follows: (a) purchasing materials; (b) processing customer orders; (c) setting up production; (d) machining; (e) assembly; and (f) the production itself (the latter activity will simply represent variable costs associated with production, i.e. direct labour and material costs) ...
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