Ascertain the cost driver rates and also compute the cost of batch of components using ABC. The following balances existed in Columbus Ltd. Cost Ledger as on 1st April, 2023.

Steps to Solve

1. Identify Total Costs First, we need to summarize the costs mentioned in the cost ledger. Extract the figures from the ledger for finished products, manufacturing overhead, raw materials, direct wages, and other expenses.

Example of costs:

• Finished Product: $168,000$
• Manufacturing Overhead: $72,000$
• Raw Materials Purchased: $40,000$

2. Calculate Total Cost Incurred Add all the costs for the three months to find the total cost incurred.

$$ \text{Total Cost} = \text{Finished Product} + \text{Manufacturing Overhead} + \text{Raw Materials} + \text{Direct Wages} + \text{Indirect Wages} $$

3. Determine Cost Driver Rates Establish cost drivers based on the costs incurred. Cost drivers can be identified based on the production volume, labor hours, or any other relevant factors.

For example, if using direct labor hours:

• If direct wages amounted to $40,000$, and total labor hours were $2,000$, then cost driver rate will be:

$$ \text{Cost Driver Rate} = \frac{\text{Direct Wages}}{\text{Total Labor Hours}} $$

4. Apply Activity-Based Costing (ABC) Using the cost drivers calculated, apply ABC to ascertain the cost of the batches. Multiply the cost driver rates by the activity levels for each batch.

Example:

• If the cost driver rate for direct wages is determined to be $20$ per hour, and a particular batch required $100$ hours of direct labor:

$$ \text{Cost of Batch} = \text{Cost Driver Rate} \times \text{Hours Used} $$

5. Summarize Costs for Batches Sum the costs from all activities to get the total cost for producing that batch of components.

$$ \text{Total Batch Cost} = (\text{Direct Material Cost}) + (\text{Direct Labor Cost}) + (\text{Overhead Cost}) $$