Home › Textile Costing › Lecture 11
Textile Costing · Lecture 11
Advanced Costing Systems — Activity Based Costing
Why a volume-based allocation hides the true cost of small lots, and how tracing set-up cost per lot changes the picture.
ABCSet-up costVolume distortion
The same four products, two costing systems
Four products — small or big, low or high volume — each processed as one lot in the month. Material and labour are Rs 100 per kg each; every lot needs a Rs 50,000 set-up; other fixed cost is Rs 240,000. Conventional process costing spreads all fixed cost on kilograms consumed; ABC traces the set-up to the lot that caused it and spreads only the remaining fixed cost on kilograms.
| A | B | C | D | E | |||||
|---|---|---|---|---|---|---|---|---|---|
| 1 | Material cost per kg | ||||||||
| 2 | Direct labour per kg | ||||||||
| 3 | Set-up cost per lot | ||||||||
| 4 | Lots processed in the month | ||||||||
| 5 | Other fixed cost | ||||||||
| 6 | Total fixed cost | 440,000 | |||||||
| 7 | A: small, low vol. | B: small, high vol. | C: big, low vol. | D: big, high vol. | |||||
| 8 | Material per unit (kg) | ||||||||
| 9 | Units per lot | ||||||||
| 10 | Total material consumed (kg) | 100 | 1,000 | 300 | 3,000 | ||||
| 11 | Total kg (all products) | 4,400 | |||||||
| 12 | Conventional process costing | ||||||||
| 13 | Material + labour per lot | 20,000 | 200,000 | 60,000 | 600,000 | ||||
| 14 | Allocated fixed cost per lot (on kg) | 10,000 | 100,000 | 30,000 | 300,000 | ||||
| 15 | Total cost per unit | 300.00 | 300.00 | 900.00 | 900.00 | ||||
| 16 | Selling price (cost + 10%) | 330.00 | 330.00 | 990.00 | 990.00 | ||||
| 17 | Activity based costing | ||||||||
| 18 | Set-up cost per lot | 50,000 | 50,000 | 50,000 | 50,000 | ||||
| 19 | Other fixed cost per lot (on kg) | 5,455 | 54,545 | 16,364 | 163,636 | ||||
| 20 | Total cost per unit (ABC) | 754.55 | 304.55 | 1263.64 | 813.64 | ||||
| 21 | Profit per unit at the conventional price | (424.55) | 25.45 | (273.64) | 176.36 | ||||
blue = input (edit me)grey = formula (click to see it)
Conventional costing says every product earns 10%. ABC shows the two small lots (A and C) are sold far below cost and the large lots subsidise them. Marketing that quotes “cost plus 10%” from the conventional sheet is quietly losing money on every small order.