QUANTUMTM

SUBMITTED TO-

SUBMITTED BY-

DR.SUVEERA GILL

SAHIL MADAAN
SAGAR
CHIRAG MADAAN
AJAY
DEEPAK
JASHANDEEP SINGH

OUTLINE
Opening the case
Case overview
Concepts
Back to the case
Closing the case
References

OPENING THE CASE

LEARNING OUTCOMES
ACTIVITY BASED COSTING
CALCULATING ACTIVITY BASED COST

CASE OVERVIEW
QuantumTM manufactures electronic testing and measurement

instruments. Many of the products are custom designed.

The company prices its instruments at 30 per cent over estimated

cost(excluding administrative and selling costs).

Recently, the company is receiving fewer larger orders for instruments

that are relatively simple to produce, and customers are saying that the
company is not price competitive. The company, is however receiving
more small orders for complex instruments.

According to Jason Norton, VP of operations, they are still practicing

product costing technique and there is a need to shift towards activity

based costing.
A consultant is hired to conduct a preliminary ABC study to determine

how a switch to ABC would affect product cost.

The consulting firm selected two recent orders for study 900 unit order

for a temperature-monitoring device and an order for 1 harmonic

analyzer.

 The costs and price charged were as follows:

Component cost per unit

Temperature
Monitor

Harmonic
Analyzer

$250

$2,500

25

500

Overhead per unit

120

2,500

Cost per unit

395

5,500

Markup at 30%

119

1,650

Price per unit

514

7,150

Number of units

900

$462,600

$7,150

Direct labor per unit

Value of order

In the current system, overhead is applied based on an estimate of

$50,000,000 of annual overhead and $10,000,000 of direct labor cost.

The consultants have broken the $50,000,000 of annual overhead into

six cost pools and identified related cost drivers as follows:

Cost Pools

Annual Cost

Product design

$8000000

Material ordering and handling

Inspection
Setup

10000000
3500000
2500000

Labor-related overhead
Depreciation of plant and
equipment

8000000
18000000
$50,000,000

Annual Driver
Value
160,000 design
hours
125,000 unique
part's
560,000 inspections
80,000 setups
$ 10,000,000 direct
labor
225,000 machine
hours

 The consultants have also found that the monitor and analyzer make

use of the cost drivers as follows:

The following values relate to

the entire order of 900 monitors
(this is not per monitor):

Number of design
hours
47
Number of unique
parts
17
Number of
inspections
225
Number of setups
1
Machine hours
112

The following values relate to

the order for 1 analyzer :

Number of design
hours
110
Number of unique
parts
25
Number of
inspections
20
Number of setups
1
Machine hours
7

CONCEPTS

PRODUCT COSTING
Product costing is also known as traditional costing. This method

seeks to allocate all costs down to individual units of finished

product. The rationale behind product-based costing is that each unit
produced caused a certain percentage of both the fixed and variable
expenses the company incurred.

ACTIVITY BASED COSTING

Activity-based costing (ABC) is an accounting method that identifies

the activities that a firm performs and then assigns indirect costs to
products. An activity-based costing (ABC) system recognizes the
relationship between costs, activities and products, and through this
relationship, it assigns indirect costs to products less arbitrarily than
traditional methods.

STEPS FOLLOWED IN ABC

IDENTIFYING RESOURCE COSTS AND
ACTIVITIES

ASSIGN RESOURCE COSTS TO ACTIVITIES

ASSIGN ACTIVITY COSTS TO COST OBJECTS

ABC VS TRADITIONAL COSTING

ABC system differs from the traditional costing system in the following
characteristics:
Products maybe assigned non-manufacturing as well as manufacturing

costs. Many of the non-manufacturing costs are also part of the costs of
products since they can be easily traced to individual products.
A cost is assigned to a product or cost object only if that cost would be

affected by decisions concerning that product or cost object.

A number of overhead cost pools are used, each of which is allocated to

products and other costing objects using its own specific measure of
activity.

The allocation bases frequently differ from those used in traditional

costing systems. Use of cost-hierarchy is made to identify cost

allocation bases.
The overhead rates or activity rates may be calculated on the basis of

the level of activity at capacity rather than on the predetermined or

budgeted level of activity.

BACK TO THE
CASE

Question 1
Based on the consultants work to date,

calculate the ABC cost per unit of each

product.

Solution
Firstly , calculate the activity rates :
COST POOLS

ANNUAL
COSTS (a)

ANNUAL
DRIVER
VALUE (b)

ACTIVITY RATE
(a/b)

Product design

$ 8,000,000

160,000 design
hrs

50 per hour

Material
ordering and
handling

$ 10,000,000

125,000 unique
parts

80 per part

Inspection

$ 3,500,000

560,000
inspections

6.25 per
inspection

Setup

$ 2,500,000

80,000 setups

31.25 per setup

Labor-related
overhead (OH)

$ 8,000,000

$10,000,000 DL
C

0.8 per labor

cost

Depreciation of
plant and
equipment

$ 18,000,000

225,000 MH

80 per hour

Now, we will calculate the overhead cost

per unit

temperature monitor
Cost pool

Activity rate
(x)

Activity
(y)

Overhead
Cost ( z=
x*y)

Overhead
per unit
(z/900)

Design

50 per hour

47 hours

2350

$2.61

Mat. Order

80 per part

17 parts

1360

$1.51

Inspection

6.25 per
inspection

225 insp.

1406.25

$1.56

Setup

31.25 per
setup

31.25

$0.03

Labour OH

0.8 per
labour cost

$25 labour
cost per
unit

n/a **

$20

112 MH

8960

$9.95

Depreciation 80 per MH

Total
$35.66 per
overhead
unit
per unit ** activity (labour OH) is already given in per unit terms
so, total labour related overheads need not be calculated

Harmonic analyser
Cost pool

Design

Activity
rate (x)

Activity
(y)

50 per
hour

110 hours

Overhead
Cost for
all units
( z= x*y)

Overhead
per unit
(z/1)

$5500

5500

Mat. Order

80 per part 25 parts

$2000

2000

Inspection

6.25 per
inspection

20 insp.

$125

125

Setup

31.25 per
setup

$31.25

31.25

Labour OH

0.8 per
labour

$500
labour
per unit

Depreciatio 80 per MH
n

7 MH

N/A**

$560

400

560

Finally, component cost per unit, labour cost per

unit and overhead per unit are clubbed to get
total cost per unit

Temperature monitor
Component cost per unit

$ 250

Labour per unit

$ 25

Overhead per unit

$ 35.66

Total cost per unit

$310.66 per unit

Harmonic analyser

Component cost per unit

$2500

Labour per unit

$500

Overhead per unit

$ 8616.25

Total cost per unit

$ 11616.25 per unit

Question 2
calculate the ABC cost of the data-

logging device ?

Solution :
overhead cost calculations :
Data logging device (total units=1)
Cost pool

Activity
rate (x)

Activity
(y)

Overhead
Cost for
all units
( z= x*y)

Overhead
per unit
(z/1)

50 per hour

27 hours

$ 1350

$ 1350

Mat. Order

80 per part

17 parts

$ 1360

$1360

Inspection

6.25 per
inspection

12 insp.

$ 75

$ 75

Setup

31.25 per
setup

$ 31.25

$31.25

Labour OH

0.8 per
labour

$3000
labour per
unit

Depreciatio
n

80 per MH

10 MH

Design

N/A**

$2400

$ 800

$ 800

Total
overhead

$6016.25
per unit

data logging device

Component cost per unit

$ 9000

Labour per unit

$ 3000

Overhead per unit

$ 6016.25

Total AB cost per unit

$18016.25 per unit

Therefore
ABC cost of one data logging device =$
18016.25

Question 3
Suppose QuantumTM meets its competitors price and gets
the job. What will be the impact on company profit? In
answering This question, make the following assumptions:
1. 40% of design costs are fixed, and 60% vary with design hours.
2. 30% of material ordering and handling costs are fixed and 70%
vary with the number of unique parts.
3. 50% of inspection costs are fixed, and 50% are variable.
4. 80% of setup costs are fixed and 20% are variable.
5. 20% of labor related costs are fixed, and 80% are variable.
6. Prices charged to this customer or other customers in the future
will not be impacted by the current deal. This follows because
each order is somewhat unique.

SOLUTION :
Firstly , total variable overhead cost of unit are
calculated (depreciation is ignored)

Data logging device (total units=1)

Cost
pool

Total
Overhe
ad per
unit
(z/1)

Variable Variable
overhea
overhea d per
d (p)
unit

$ 1350

$ 1350

60%

0.6*1350
=$810

$ 1360

$1360

70%

0.7*1360
= $952

Inspectio 6.25 per 12 insp.

n
inspectio
n

$ 75

$ 75

50%

0.5*75=
$37.5

Setup

31.25
per
setup

$ 31.25

$31.25

20%

0.2*31.2
5=
$ 6.25

Labour
OH

0.8 per
labour

$3000
labour
per unit

$2400

80%

0.8*2400
=
$1920

Design
Mat.
Order

Activity
rate (x)

Activity
(y)

50 per
hour

27 hours

80 per
part

17 parts

Overhe
ad
Cost
for all
units
( z=
x*y)

N/A**

Now we calculate incremental cost :

data logging device
Component cost per unit

$ 9000

Labour per unit

$ 3000

Variable Overhead per unit

$ 3725.75

Total incremental cost per

unit

$ 15725.75 per unit

Now, competitors price = $22,000

given that

competitors price = selling price for device

So, profit= $22,000-$ $ 15725.75

= $ 6274.25

CLOSING THE CASE

This case deals with the concept of activity

based costing and its application in calculation

of product costs
In this case, the ABC costs are calculated for
the three products : temperature monitor,
Harmonic analyzer and Data logging device
We hereby conclude that company can
provide the product at the less cost to the
buyer by only recovering the variable cost as
this order is somewhat unique.

REFERENCES
Vaidya S.C. , Gill S. Cost Management : a

strategic approach MacMillan India ltd. 1st

ed (2009) pg. no. 99-109
Jiambalvo J. Managerial Accounting Wiley
India pvt ltd. , New Delhi, 5th ed (2016) pg. no.
219-230