Activity Based Costing

I am selecting a company called Spear Motors dealing in automobile business and am looking at activities within one month.

The services that would require activity based costing in the organization is Motor Vehicle Repairs/ Servicing.

In the process of repairing Vehicles, a number of activities would be undertaken. The table below shows the activities and their respective cost drivers;

Material Handling;

The material handling activity entails making an order for the parts required to repair a car from the suppliers and this attracts ordering cots every time an order is made. Once the materials are received in the stores, a requisition has to be made from the service department for the particular part(s) required to fix the motor vehicle, this process entails material handling and attracts a cost every time the activity is performed and the order made.

Motor Vehicle inspection;

Inspection of the motor vehicle takes place at the point when a motor vehicle arrives in the service department for servicing. Before a motor vehicle is serviced, it has to be diagnosed/ inspected to detect the problem before any work can be performed. Every motor vehicle that is inspected, a cost is attached in terms of the inspection costs. The total cost always depends on the number of motor vehicles inspected in a certain period.

Set-up;

Setting up of the machines to execute a particular work plan/schedule on a motor vehicle then takes place. This setup is done depending on the problem that was detected on the motor vehicle. Every time a car is being repaired, the machines have to be setup again to match that particular motor vehicle and the repair being done on it.

The table below shows the estimation of the costs activities per month;

Below are the cost drivers;

• Number of orders = 200
• Inspection =150
• Setup =150

Cost driver rates will be got by dividing the cost activity by cost driver as follows;

Material handling        = 200,000

                                          200

                                    = 1,000 Per Order

Inspection                  =70,000

                                       150

                                   = 467 Per Inspection

Setup                         =10,000

                                      150

                                  = 67 Per setup