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# activity based costing formula

Question:Plz explain what kind of costing method this is...plz also include advantages and limitations of this method

Answers:Activity based costing tries to account for the cost of an item through the activities which go into making it. For example, if I am making a hammer I have to source the metal, forge it into a hammer, finish and polish it, put a handle on it, package it, and ship it to the point of sales. Activity based costing would assign costs to each of these various process and attempt to track them separately so that you could see which particular part of the process was saving money, or spending money over their budget. It has the advantage of focusing your attention on various parts of an overall cycle, so you can hopefully make improvements where needed. The big disadvantage is that you can put allot into it by breaking the process into more and more activities. The more detailed you are the more information you have, and the more you have spent tracking it. In the end if you don't use the information you have just spent allot of money on nothing.

Question:Thermal Rising, Inc., makes paraglider's for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paraglider's. Management has designed an activity-based costing system with the following activity cost pools and activity rates: Activity Cost Pool Activity Rate Supporting direct labor $22 per direct labor-hour Order processing$190 per order Custom designing processing $254 per custom design Customer service$430 per customer Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months: ______________________ Standard Model____________Custom Design Number of gliders ______________ 11 __________________3 Number of orders _____________1___________________3 Number of custom designs_________ 0 __________________3 Direct labor-hours per glider_______ 28.5 _______________ 32 Selling price per glider _________ $1,700 _____________$2,360 Direct materials cost per glider ______$450 _____________$570 The company's direct labor rate is $18 per hour. Using the company's activity-based costing system, compute the customer margin of Big Sky Outfitters. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) what is the customer margin?

Question:Milbie Company has been allocating the cost of warehouse storage space based on the actual usage of square feet by the 3 products it makes and sells. The annual cost of warehouse storage to Milbie is $70,000. The practical capacity is 10,000 square feet but the amounts of space in square feet used by A, B, and C respectively are 3,000, 2,500 and 1,500. Accordingly the traditional allocation rate is$10 per square foot and the allocations are $30,000,$25,000, and $15,000. The new manager feels that too much warehousing cost is being allocated to these 3 product lines, and that the cost of the unused capacity should not be allocated to the products. REQUIRED: Using an activity based costing approach calculate how much should be allocated to product A. Can you show me how to do this problem step by step, I keep getting it wrong. Thank you Answers:Well, you could argue that the unused warehouse space is still a fixed cost, and should be prorated to the users, at$10 per sq ft. But using an ABC approach, the rate per sq ft should be $7. So Product A would get$21,000 allocated.