Activity based costing seeks to seek the profitability of a business based on costing of all
activities engaged in per commodity or good and the income it brings. This enables one to tell
what a business does to bring profits rather than reporting what was spent on what. This brings
the importance of categorizing activities so the there is categorization in terms of value added
activities and non-value- adding activities. It is such differentiation that enables managers and
businessmen on what activities to cut costs and where to increase more funding. ABC is unique
from other analysis tools for these features besides indicating cost drivers.
While the profitability statement generalizes activities so that the costs are shared among the
three types of seats, it is important to note that some activities indeed don’t add value to the
production but cost the manufacturer. Generalizing costs of labor and materials without showing
specifically where these costs are generated might lead to unnecessarily costs. The costs of
materials is general, but the types of materials in place are different. For instance, wood used in
making comfort seats is more than the one used in relaxer and Scandinavia and incase of leather
used, not all seats use leather. The processes involved in using these processes might be costly
than others, which brings out the importance of having group overheads, cost pools and unit of
cost driver.
In looking for the profitability of the business, each activity should be addressed and pooled in
its own group and the income from each seat analyzed. The purchasing of leather and inspection
of the same for instance should be considered for both comfort and relaxer and ignored for
Scandinavia for it does not use it. For this, it will be evident that some activities make
commodities face more expenses than others while others need not be used for they add no value
to the product.
no.
Set up costs 5,600 Set ups
Purchasing and checking 4,000 Leather per 6 £ 666.67/wood purchase
chair
Quality inspection of 3,200 Leather per 6 £ 20/ dispatch and transport
personnel costs
Administration and 13,30 Labor per 60 hours Total £ 2860.72
checking leather
hides
Purchase of 857.14 771.43 771.43
wood
Quality 2133.33 1066.67
Inspection of
leather seating
Set up 9960 8300 6640
administration
and transport
Totals 15617.14 11471.40 7411.43
Costs per chair 520.57 95.60 49.40
Profitability -125.57 189.40 175.6
ABC analysis clearly indicates different profitability for the different seats. The comfort is
operating at loss. Relaxer on the other hand in a generalized costing analysis appears to make no
profit but in the ABC makes biggest profit followed by the Scandinavia which makes a loss in