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Hello Sir
I am really confused about the concept of ‘Set Up Costs’ in ABC.
I have solved quite a few questions, and in some of them I have had to find out the set up costs by using
Total Set up = budgeted production/batch size * set up per batch
Sir, can you please explain this to me
I have watched your videos and read the kaplan text and yet have not understood this concept.In questions like Gadget Co (question below)
The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:
ABC
Production and sales volumes (units) 15,000 12,000 18,000
Selling price per unit $7.50 $12 $13
Raw material usage (kg) per unit 2 3 4
Direct labour hours per unit 0·1 0·15 0·2
Machine hours per unit 0·5 0·7 0·9
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries to retailers per annum 48 30 62
The price for raw materials remained constant throughout the year at $1·20 per kg. Similarly, the direct labour cost
for the whole workforce was $14·80 per hour. The annual overhead costs were as follows:
$
Machine set up costs 26,550
Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320For ABC, they have no used calculation of set up costs of budgeted production/batch size
Sir, can you please explain when and why we calculate set up costs in ABC
Thank you, Sir!
You do not need to type out full past exam questions. I have all past exams and so all you need to do is tell me the name of the question and the date of the exam 🙂
They need to spend money on setting up the machines every time they produce a batch of one of the products (i.e. each time they have a production run). They keep alternating between producing batches of each product, and every time they switch to a different product then they have to spend money setting up the machines for that product.
Here, in total they are making 36 production runs and are therefore setting up the machines 36 times. The total cost of setting up the machines is $26,550, and therefore the cost each time they set-up is 26,550/36 = $737.50. So the total cost of set-ups for product A is 16 set-ups x $737.50 = $11,800.
We add this to the other overheads involved in making product A, and then to get a cost per unit we divide by the total number of units of Product A that are produced.
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