Solved ABC : Black Ridge Activity-Based Costing Accounting
Black Ridge Activity Based Costing (ABC)
Activity-based costing (ABC) is an accounting process that enables Black Ridge to assign overhead activities costs of the firm to the specific products and services it produces & delivers.
Compare to the traditional process, ABC assigns the overheads and indirect costs less arbitrarily and focuses on true relationship between costs, overhead activities, and related products (manufactured, produced) / services delivered by Black Ridge.
Solving Black Ridge Costing Problem with ABC Accounting Method
Black Ridge markets two types of products in the Misc. Financial Services industry. For sake of simplicity let us call them Financial Standard product and Financial Custom Product. Standard Product is lot simpler than Custom Product, so Black Ridge produces Standard product in large batch sizes compare to Custom product which is produced in smaller batch sizes.
Black Ridge Standard Product
Black Ridge Custom Product
The difference between the traditional method and ABC can be only noticed when there are different types of products produced by Black Ridge and indirect costs comprise a significant chunk of the overall cost structure of Black Ridge.
To calculate the "Overhead Recovery Rate" add up all the indirect costs that Black Ridge is incurrring for both the standard and custom product.
Return on Sales Calculations for Black Ridge
Activity Based Costing System for Black Ridge
Activity Based Costing can improve the costing process at Black Ridge in three prominent ways –
After identifying all the support activities and associated costs & factors that drive those cost, managers at Black Ridge can take following steps to conduct ABC costing -
The profit per unit of standard product is higher than custom product under ABC technique.By comparing the Return on Sales numbers under both traditional and ABC technique - We can easily conclude that ABC is far more effective costing technique for Black Ridge as it stops inefficient allocation of costs to Standard product. Black Ridge should focus on standard product rather than custom product as standard product is delivering much higher returns on sales.
References for Activity-Based Costing for Black Ridge
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Black Ridge Activity Based Costing (ABC) Solution
You can download Excel Template of Activity Based Costing of Black Ridge