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🔴 Activity Based Costing Example in 6 Easy Steps - Managerial Accounting with ABC Costing - YouTube
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Activity Based Costing Example in 6 Easy Steps
tutorial lesson review ABC (Revised)
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Okay.
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Welcome back again to MBAbullshit.com.
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Our topic for this video is “Activity-Based
Costing for Accounting”, also known as ABC.
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Remember you can always go back to MBAbullshit.com.
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Alright, so now I’d like to start with a
simple story.
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This is a simple problem and I’d like to
start with a story.
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Let’s say that there’s this mobile phone
company called “ABC Mobile Phone Company”
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and we’d like to find out the overhead cost
of each phone for each phone model and this
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company has two models.
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It has a premium model which is the “PDA
Phone” and it also has the “Simple Phone”
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which just does the usual calling and whatever
stuff.
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So to get this for this example we’re going
to look at one year of data.
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Now this is just an example.
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It can be different time period in different
problems but it’s pretty much the same process.
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So for this simple example, we will use one
year of data.
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Now let’s look at the given information
for this story for this problem.
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So let’s look at the phones manufactured
in one year.
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For the PDA phones, there were three thousands
units manufactured in one year.
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And for the simple phones, there were seven
thousands unit manufactured in one year.
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So that makes a total of ten thousands units
all in all.
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Now, let’s look at the overhead cost in
one year.
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Again, this information is given.
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So for this case, let’s say that there were
Machine Maintenance Costs of four hundred
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thousand dollars and there were Quality Control
Costs of six hundred thousand dollars.
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So that makes the total Overhead of the Firm
one million dollars.
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Four hundred thousand plus six hundred thousand
is one million dollars.
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Now, take note: To keep it simple, we only
use two types of overhead in this example.
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But in other problems, there can be more types
of overhead, such as rent, electricity, etc.
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Now, continuing with the given information.
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Let’s just say that we’d like to look
at the quantity of each type of overhead.
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So for the Machine Maintenance Cost which
is one of the overhead, let’s look at the
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number of Machine Hours used.
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So let’s just say for this example, the
machine was used a total of ten thousand hours.
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So this number of machine hours is the way
we will count or measure how much machine
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maintenance we did.
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Different accountants or different engineers
might have different ways of measuring the
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amount that the machine was used.
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They might use the amount or the number of
times the machine was switched on or the number
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of days the machine worked or whatever.
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But for this simple example, let’s just
say that this company measures the amount
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that the machine is used based on the number
of hours that it is used.
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And let’s just say that it was used for
ten thousand hours.
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It doesn’t matter if it’s one machine
or many machines; or for this simple example,
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let’s just say it’s just one machine.
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It was used for ten thousand hours.
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How about the other overhead cost of Quality
Control?
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Well, let’s measure it by the number of
inspections.
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Again, other accountants might have other
ways of measuring how much quality control
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was done.
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But for our example, let’s just pretend
that this company measures the amount of quality
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control by counting the number of inspections
done by the quality control officers.
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So, let’s just say it’s one thousand inspections.
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Alright, so far so good.
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This is all given information.
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Now, let’s look at the quantity of each
type of overhead used by each type of phone.
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So first let’s look at the PDA phones, five
thousand five hundred machine hours used in
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making the PDA phones and there were six hundred
fifty quality inspections done on PDA phones
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throughout the year.
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This is still given.
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No computation yet done here.
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And for the Simple phones, there were four
thousand five hundred machine hours used and
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three hundred fifty quality inspections done.
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Again, this is all given.
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But before we move on, I’d like to point
something out.
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How much is five thousand five hundred hours
plus four thousand five hundred hours or machine
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hours equals, remember the last slide?
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The total machine hours used is ten thousand.
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So, five five plus four five is equal to ten
thousand.
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Now, the other thing we going to ask is for
the PDA phones and also the Simple phones.
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So for the PDA phones, there were six hundred
fifty quality inspections done; and for the
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Simple phones, there were three hundred fifty
inspections done.
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Another thing you’ll notice, three hundred
fifty in quality inspections plus six hundred
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fifty quality inspections equals one thousand
inspections all in all.
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So, you’ll notice that in the given information,
it balances it out.
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So, that is the given information for the
problem.
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Before we move on to solving the problem,
you should know the given information.
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If you had a hard time remembering that, you
can go to my website and look at the problem
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in text format like this.
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Copy and paste it and print it out before
we move on to the next steps in solving the
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problem.
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So now we know the given information, let’s
go on to solve the problem step by step together
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and you will see how easy it is.
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