Functional-Based costing vs ABC

Discussion in 'Accounting' started by Steve, Aug 28, 2005.

  1. Steve

    Steve Guest

    All -- I have a quick question on setting up a homework problem for
    graduate level accounting.

    A group member and I are coming up with different answers to how to do
    the costing systems. Basically, the question is how much does each
    product cost, given

    Labor (1000 employees) 90,000,000
    Equipment 190,000,000
    Engineering 30,000,000

    for a total of 300,000,000.

    I broke it down by how much each employee cost (90,000,000 / (num of
    employees * available employee hours), which I came up with $45 an
    hour. Then, I broke down the equipment & engineering seperately by the
    amount of avialble machines (19) and the amount of operational hours
    (6000). I thought I was doing it by function, my group thinks I'm
    doing it by activity.

    My group member took the total hours to make a product like I did,(10
    hours), but he took the entire 300,000,000 / (num of employees * num of
    available hours), which gave him $145 an hour. The problem states the
    company charges a combined labor and overhead by hour laber plus the
    amount of materials. Isn't' this more ABC?

    I'm not an accountant either, so any help would be appreciated. I
    don't want anyone to do our homework for us, just give us a push in the
    right direction.

    Steve, Aug 28, 2005
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  2. Steve

    Wayne Morin Guest

    Your total comes out to 310,000,000, not 300,000,000.
    Wayne Morin, Aug 29, 2005
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  3. Steve


    Nov 29, 2014
    Likes Received:
    San Diego
    You're doing it by "Function" or "Cost Center". ABC determines "Cost" ( A relative term) by allocating costs to activities, regardless of labor costs. It's not process costing, it's activity costing and many activities a product goes through have little or no labor. Develop an activity map, for a product, determine the metric, the driver, then cost the activities. There is no "True Cost", only best cost.

    Read: "Relevance Lost", Harvard Business School, H. Thomas Johnson, author, with Robin Cooper and Robert Kaplan as c0-authors.
    QBslave, Jan 6, 2016
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