Page 259 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
Example: This could be understood from the following example M/S Zenith & Co.

Identification of Activities

Purchase of Materials Production of Goods Testing of Goods Recreation and
Refreshment
Classification of Activities

Primary Activities Secondary Activity

Identification of Overheads
Salary to the manager Fuel, Oil, Gas, Salary of Testing staff & Cost of coffee/tea/
and staff members, Electricity Engineers, Depreciation cold drinks/ snacks,
Processing costs Maintenance, salary on testing devices, Cost breakfast, lunch, dinner,
:- Advertisement, of engineering dept., of chemical products for recreation expenses:
Inviting the tenders, Depreciation of the testing, electricity, etc., salary to the recreation
cost of communication plant, rent, foreman staff, maintenance of
of approval of orders and so on carom board, snooker
board, subscription
for daily, weekly,
fortnightly and monthly
journals and magazines
` 45,000 ` 25,000 ` 20,000 ` 25,000
Apportionment of support activity overheads
Recreation and refreshment expenses are to be apportioned to the primary activities only on the basis of
number of employees in each activity
` 10,000 ` 10,000 ` 5,000 (` 25,000)
Total Activity cost pool
` 55,000 ` 35,000 ` 25,000
Determination of Activity Drivers
Number of Purchase Hours of Production Number of Units
Orders
5,000 Orders 3,500 Hrs 12,500 Units
Pool of Activity Cost
Calculation of Activity cost driver rate =
Activity Driver
Total Cost of Purchase Total Cost of Total cost of Testing
Production
Number of Orders No of units
Hr. of Production
` 11 per order ` 2 per Unit
` 10 per Hr
Cost Assignment

Job No: 134 requires 40 purchase orders and 40 Hrs of production, 100 units are finally produced and all
are individually tested. The total overhead cost is as follows:
Purchase order cost : 40 Orders x ` 11 per order = ` 440
Production cost : 40 Hrs x ` 10 per Hr = ` 400
Testing costs : 50 units x ` 2 per unit = ` 100
` 940

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