A LevelAccountingCambridge (CIE)Revision NotesCost & Management AccountingActivity Based Costing (ABC)Costing Statements using ABC

Costing Statements using ABC (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Tasiref Hussain

Written by: Tasiref Hussain

Reviewed by: Dan Finlay

Updated on

Costing statements using ABC

Which cost driver to use?

  • This depends of how the overheads are organised together in their cost pools

  • The cost driver should be related to the output

  • Ask the question what is the main activity that is driving the cost!

How do I use ABC costing?

  • STEP 1
    Identify the cost drivers

    • Identify the cost pool

    • Identify the cost drivers

    • Here is a table that might help:

Cost pool ($)

Cost driver

Machine set up

Number of set up's

Quality inspection

Number of quality inspections

Transfer cost

Number of transfers

Procurement / orders

Number of orders

  • STEP 2
    Calculate the cost driver rate

    • Work out the cost driver rate by using the following formula: fraction numerator Cost space pool space over denominator Cost space driver end fraction

    • For example:

      • Let's say the cost pool is machine set up with an overall cost of $50 000

      • The number of set up's needed for the machine is 250 (this is the cost driver)

      • Therefore the cost driver rate will be :fraction numerator $ 50 space 000 over denominator 250 space end fraction space equals space $ 200 space per space machine space set space up

      • So each time the machine is set up for production, it will cost $200

  • STEP 3
    Calculate the cost per batch or unit

    • Each production run is called a batch

    • Use all the information to calculate the cost per batch

    • This can then be converted to per unit, depending on how many units are produced per batch.

  • STEP 4
    Calculate the selling price

    • Use the cost per unit

    • Add the mark-up %

Worked Example

T and C limited manufacture wooden tables and chairs. The tables are made in batches of 1 000 units. The chairs are made in batches of 200 units.

The monthly production is 8 000 tables and 2 400 chairs.

Here is some more information about tables and chairs

Tables

Chairs

Direct material per unit

$40

$15

Direct labour per unit

$12

$17

Indirect production costs each month are:

  • Machine set up cost - $70 000

Each batch needs a machine set up

The business operates a 20% mark-up

Required - To calculate the cost per unit and selling price per unit for each table and chair using ABC costing.

Answer:

Find the number of set up's needed per month:

Tables = 8000 over 1000 = 8 set up's

Chairs = 2400 over 200 = 12 set up's

Total number of set up's need = 8 + 12 = 20

Work out the machine set up cost per table

  • Find the proportion of the machine set up cost that is for tables

fraction numerator $ 70 space 000 over denominator 20 end fraction cross times 8 space equals space $ 28 space 000

  • Find the set up cost per unit per table

fraction numerator $ 28 space 000 over denominator 8 space 000 space units end fraction space equals space $ 3.50 space machine space set space up space cost space per space unit

Work out the machine set up cost per chair

  • Find the proportion of the machine set up cost that is for chairs

fraction numerator $ 70 space 000 over denominator 20 end fraction cross times 12 space equals space $ 42 space 000

  • Find the cost drive rate

fraction numerator $ 42 space 000 over denominator 2 space 400 space units end fraction space equals space $ 17.50 space machine space set space up space cost space per space unit

Tables

$

Chairs

$

Direct material per unit

40

15

Direct labour per unit

12

17

Machine set up

3.50

17.50

Total cost per unit

55.50

49.50

Mark-up

20% × 55.50 = 11.10

20% × 49.50 = 9.90

Selling price per unit

66.60

59.40

Examiner Tips and Tricks

Remember to include all the cost when calculating the cost per unit. This includes direct and indirect costs.

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Author
Reviewer
Tasiref Hussain

Author: Tasiref Hussain

Expertise: Accounting Content Creator

An accomplished Accounting educator with 17 years’ experience, Tasiref combines deep subject expertise with a Master’s in Education and Leadership. A specialist in A-Level, IGCSE, and AAT (Level 4), he brings a unique "examiner’s perspective" from over a decade of marking for major boards. Tasiref uses a structured, knowledge-driven approach and high-impact materials to help students master technical processes and excel in exams.

Dan Finlay

Reviewer: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.