Activity Based Costing in 6 Easy Steps, ABC Costing

3-Minute Overview

Part 1 (Details of Video’s Example are at Bottom of This Page)

Part 2

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Detailed Problem in Video Example Above:

ABC Mobile Phone Company makes mobile phones.  How much is the overhead cost of each phone of each Phone Model (both Model-A and Model-B)?
Ex. Mobile Phone Company, 1 Year of Data
*1 year is only an example.  It can be a different time period in other problems.  But let’s just use 1 year to keep it simple for this easy example.
Phones Manufactured in 1 year:
1. PDA-phones manufactured in 1 year: 3,000 phones
2. Simple-phones manufactured in 1 year: 7,000 phones
Total Phones Manufactured in 1 year (PDA Phones + Simple Phones):  10,000 phones
Overhead Cost in 1 year:
1.Machine Maintenance Costs: $400,000
2. Quality Control Costs: $600,000
Total Overhead of Firm (Machine Maintenance + Quality Control):  $1,000,000
*To keep it simple, we have only 2 types of overhead in this example.  In other problems, there can be more types of overhead, such as rent, electricity, and more…

Quantity of EACH Overhead Type:

Number of Machine Hours Used:  10,000 hours

* The number of “machine hours” is the way we will count or measure how much machine maintenance we did.  We need to know this because machine maintenance is part of the overhead.

Quality Inspections:  1,000 inspections

* The number of “quality inspections” is the way we will count or measure how much quality control we did.  We need to know this because quality control is part of the overhead.

Quantity of EACH type of Overhead Used by EACH type of Phone:
PDA-Phones: 5,500 Machine Hours and 650 Quality Inspections
Simple-Phones: 4,500 Machine Hours and 350 Quality Inspections