Costs
attached to all activities, rather than goods. We have many examples for
calculating the Activity-Based Costing or ABC but the most appropriate example
is from SME based business activities which have variety of product to serve to
its customers and they need to calculate the each activity cost.
Explanation with Example:
If we take the example of a burger point where the staff
serving with two product burger and coca cola or Pepsi cola. The total
production cost for both product is with raw material is PKR 58.00 they are
paying the electricity and gas charges also for their operations to make the
burger and to cool their fizzy drinks bottles. The extra cost of production of
gas and electricity is 5 rupees as example we don’t know what is the
electricity charges per unit WAPDA charging to their consumers and same for gas
charges we have no information what the OGRA charging per cylinder now a days. That
is the extra cost they are paying for their product and they need to adjust it
in their production cost for that purpose they need to use the activity based
costing technique. At this point we need to make a separation between this cost
burger need the gas charges and the fizzy drinks needs the electricity charges.
The Traditional way is to add the extra costs in the production cost and sell
the product but that is not a good costing way we need to calculate the each
activity based cost through the subjected method because many customers they
just demand the burger and not like the fizzy drinks and some of them like the
both with their meal for that purpose we give the weight to each activity
according to its production or its carrying cost over their total production based.
According to this example and cost allocation to each
activity after its per day production is showing that the business spending PKR
5.00/- amount per activity production and they are selling 100 burgers and 50
fizzy drinks bottles each day so that show us that their 66.67% activity is due
to burgers and 33.33% is due to fizzy drinks so they will allocate PKR 3.33 to
each bugger cost and PKR 1.67 for fizzy drinks carrying cost and then the total
per unit cost of the burger is reach to PKR 48.33/- and fizzy drinks cost is
PKR 21.67. That is the Activity based costing method which is very famous in
cost accounting.
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