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Definition of Activity Based Costing

DrFirst 9420 Key West Ave. Suite 101 Rockville, MD 20850, USA 888.271.9898 [email protected] 301.231.9512 (F) www.DrFirst.com Privacy Policy Terms Of Use. Medrx Activity Based Costing (ABC) solution is based on HBR's ABC accounting framework. It includes - ABC Technique, Traditional method, Cost Drivers, Overhead Recovery Formula, ABC Formula, ABC based Recommednations, Cost per unit, indirect & direct costs, return on sales.

What is Activity Based Costing? How does Activity Based Costing work?

Activity-based costing (ABC) is an accounting way that enables Medrx to assign overhead activities costs of the firm to the specific products and services it produces & delivers.
Compare to the traditional way, 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 Medrx.

Solving Medrx Costing Problem with ABC Accounting Method

Medrx markets two types of products in the Biotechnology & Drugs industry. For sake of simplicity let us call them Healthcare Standard product and Healthcare Custom Product. Standard Product is lot simpler than Custom Product, so Medrx produces Standard product in large batch sizes compare to Custom product which is produced in smaller batch sizes.

Medrx Standard ProductMedrx Custom Product
Annual Sales (Units)1147012012
Sales Price (Per Unit)62 USD89 USD
Batch Size (units)100050
Direct Labor Time / per unit22.5
Direct Labour rate per hour88
Direct Input cost per unit 22 32
Number of Custom Parts per unit1 4
Number of Set-Ups per batch13
Separate Material per batch11
Number of Sales Invoices - issued per year50240
Overhead Cost AnalysisUSDCost Drivers
Set Up Costs73505Number of Set Ups
Special part handling cost60044Number of Special Parts
Customer invoicing cost29250Number of Invoices
Material handling cost62130Number of Batches
Other overheads107408Labor Hours

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Solution Based on Traditional Approach of Costing


Traditional Approach - Absorption Approach
The difference between the traditional method and ABC can be only noticed when there are different types of products produced by Medrx and indirect costs comprise a significant chunk of the overall cost structure of Medrx.
One of the key reasons why small firms still use traditional method is its sheer simplicity. ABC can be highly complex if the firm is present in number of industries and, produce & market various products around firm's core competency.
How direct costs are treated in ABC? Is it different from the way it is treated under traditional approach?
The answer is no difference at all. ABC is concerned only with the way in which overheads are charged to jobs to derive the full cost.


Step 1 - Calculating Overhead Recovery Rate of Indirect Costs

Overhead Cost AnalysisUSD
Set Up Costs73505
Special part handling cost60044
Customer invoicing cost29250
Material handling cost62130
Other overheads107408
Total Overheads (1+2+3+4+5) 332337

To calculate the 'Overhead Recovery Rate' add up all the indirect costs that Medrx is incurrring for both the standard and custom product.


Overhead Recovery Rate Formula

Overhead Recovery Rate = Total Overheads / Number of Labor Hours

Drivers Medrx

Overhead Recovery Rate = 6.27 Per Hour


Step 2 - Product / Service Costs - Adding Direct and Indirect Costs
Standard ProductCustom Product
Direct Costs
Labor
Hrs * Labor/hr
1620
Material2232
Indirect Costs
Overheads (recovery rate * hours) 12.5415.675
Total Costs Per Unit (1+2+3) 50.54 67.675

Using the Overhead Recovery Rate Calculation we can assign the indirect cost to individual products. We are just allocating the variable or indirect costs based on the hours taken by labor to produce the standard and custom products.
Total cost per unit under the traditional method can be calculated by adding up - Raw material costs, labor costs, and indirect cost allocation using Overhead Recovery Rate formula.

The Total Cost per unit of Standard product is 50.54
The Total Cost per unit of Custom product is 67.675

Return on Sales Calculations for Medrx

Return on Sales metrics enables the firm to allocate resources where it can maximize returns. After subtracting the cost per unit of the product from sales price of the product we can arrive at the profit per unit.

Standard ProductCustom Product
USD per UnitUSD per Unit
Selling Price6289
Total Cost50.5467.675
Profit11.4621.325
Return on Sales18.4823.961

The profit per unit of custom product is higher than standard product.In isolation these numbers don't provide a great insight as price is often the function of competitive forces in the market place. To explore further we should analyze - Return on Sales per unit.



Activity Based Costing System for Medrx


Activity Based Costing can improve the costing process at Medrx in three prominent ways –
By increasing the number of cost pools – ABC help in identifying the activities that are being performed by organization’s resources. Often too narrow allocation can result in unclear understanding of both activities and how resources spent on them.
By assigning costs to various activities that are segmented based on the role they perform in overall processes. Instead of treating all indirect costs as one organization wide pool, ABC pools the costs based on each activity.
Finally assigning costs to respective products, service and customers activities in the organization using activity cost drivers.

How to calculate Activity Based Costing & What is the formula for Activity Based Costing?

After identifying all the support activities and associated costs & factors that drive those cost, managers at Medrx can take following steps to conduct ABC costing -
Step 1- Establishing Cost Pool for each activity based on the Biotechnology & Drugs dynamics.
Step 2 - Allocating total cost associated with each activity to the relevant pool.
Step 3- Calculating Per Unit Cost based on the relevant cost driver.
Step 4 Final Step - Dividing the amount in each pool by estimated total usage of the cost driver. Then the unit cost is multiplied by the number of units of the cost driver of that specific product.
You can easily follow the above four steps in the following table of ABC Calculations.

ABC Calculations

Overhead Cost Driver(a) Standard Diver Volume(b) Custom Diver Volume(c) Total Diver Volume a+b(d) Costs USD(e) Driver Rate (d/c)(f) Standard Total Cost a*e(g) Custom Total Cost b*e Standard Unit Costs Custom Unit Costs
Set Up CostsSet-up per Batch1272073273505100.416666666671205723000.10505666957286.018981018981
Special part handling costSpecial Parts per unit114704804859518600441.008837662555911571.36798951648472.6320104841.00883766255594.0353506502235
Customer invoicing costInvoices per year5024029029250100.862068965525043.103448275924206.8965517240.439677719989182.0152261531572
Material handling costNumber of Batches11.47240.24251.7162130246.831671367842831.159270589259298.8407294110.246831671367844.9366334273569
Other overheadsLabor Hours2294030030529701074082.027713800264346515.75457806360892.2454219374.05542760052865.0692845006608

Per Unit Overhead Cost using ABC


There are two steps to calculate per unit overhead costs using ABC method. First calculate per unit cost based on cost driver usage by specific product and then add those overhead costs for the product to arrive at Per Unit Overhead Cost of a product

Overhead Unit Cost StandardCustom
Set Up Costs0.1050566695728 6.018981018981
Special part handling cost1.0088376625559 4.0353506502235
Customer invoicing cost0.44 2.02
Material handling cost0.24683167136784 4.9366334273569
Other overheads4.0554276005286 5.0692845006608
Total Overheads5.86 22.08
The total overheads of standard unit using ABC costing is 5.86 and the overheads of custom unit uning ABC costing method is 22.08

Total Cost Using ABC Technique


The total cost per unit of standard and custom product can be calculated by adding up - direct cost, raw material cost, and ABC derived per unit indirect cost.


Standard ProductCustom Product
Direct Costs
Labor
Hours * Cost of Labor per Hours
1620
Material2232
Indirect Costs
ABC- Overhead 5.8622.08
Total Costs Per Unit
(1+2+3)
43.86 74.08
The Total Cost per unit of Standard product is 43.86
The Total Cost per unit of Custom product is 74.08

If we compare the total costs using traditional method and ABC method, we can easily observe that the difference between the total cost of custom product to that of standard product is far higher under ABC method than it is under the tradtional method.

Return on Sales Using ABC Costing Analysis

Standard ProductCustom Product
USD per UnitUSD per Unit
Selling Price6289
Total Cost43.8674.08
Profit18.1414.92
Return on Sales29.2616.769

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 Medrx as it stops inefficient allocation of costs to Standard product. Medrx should focus on standard product rather than custom product as standard product is delivering much higher returns on sales.


Limitations of ABC Costing Method

ABC is time consuming and costly.
Setup costs and updating cost for example in the automobile industry is very high and ABC fails to inculcate it.
Business with similar product and services output that require similar activities then the benefits from ABC are very limited.


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Last updated on February 4th, 2017

Several times I have faced problems with USB devices in all Windows versions. For instance a USB device (e.g. printer, scanner or webcam) is not functioning or a USB storage device (e.g. USB flash disk) is not detected at all. USB devices issues can occur for different reasons.

For example, when you eject a USB storage device without using the “Safely Remove hardware” option or after a program or Windows Update or after a virus attack. If you face problems with USB devices, then you can use this troubleshooting guide to resolve your USB problems.

USB Errors – Symptoms that can fixed using this guide:
– USB Device not recognized
– USB Printer not recognized or not printing
– USB Storage device cannot be recognized or ejected through “Safely Remove” option.
– USB device driver not successfully installed or Windows cannot install USB device error.
– Unrecognized USB device in Device Manager (error code 43)

How to Troubleshoot & Solve USB device recognition issues.

Before continuing to apply the solutions given below perform these steps:

1. Completely Shutdown your computer and remove the power cable. (Also remove the battery if you own a laptop). Leave it unplugged for about 5-10 minutes and then re-plug the power cord (and the battery). Turn On your computer and check if your USB devices are working.

2. If you own a laptop:

  • Turn off your laptop.
  • Unplug the AC power adapter and the battery.
  • Leave your computer without power for about 15 minutes.
  • Reinsert the battery
  • Turn on your laptop.
  • Plug one by one all USB devices.
  • Check if the USB not recognized problem is solved and the USB devices are working.
  • Plug the AC power adapter.

3. Change the USB cable that connects your computer with the USB device.

4. Download Hirens BootCd and boot your computer in MiniXP environment. Plug a USB flash stick on an empty port. Open Windows Explorer and check if you can access USB stick's contents. (Instructions on how to download and start your computer from HirensCD MiniXP can be found at the steps 1,2 & 3 on this tutorial). If you cannot access USB stick's contents, then probably your motherboard's USB ports are damaged.

5. Scan your computer for malware by using the instructions in this guide: Quick Malware Scan and Removal Guide.

Solution 6: Completely Remove and Re-Install all Universal Serial Bus Controllers & USB Devices

Solution 1: Solve USB problems with Microsoft USB Fix It utility.

1. First download the Microsoft Fix It utility to your computer.*

* Notes:
– Windows 8 & 8.1 users must download the Windows 8 USB Hotfix.
– Windows 7 USB Fix it Utility can work also for Windows Vista & Windows XP.
– Windows Vista users can try also the USB Devices Fix It utility for Windows Vista.
– Windows XP users can also try the USB Fix it for Windows XP.

  • Windows 8, 8.1, Server 2012: USB Hotfix (https://support.microsoft.com/kb/2830154).
  • Windows 7, Vista & XP:USB Fix It utility (https://support.microsoft.com/mats/windows_usb_diagnostics).
  • Windows Vista (alternative): USB Devices Fix It for Windows Vista (http://windows.microsoft.com/en-us/windows-vista/tips-for-solving-problems-with-usb-devices)
  • Windows XP (alternative): USB Fix It for Windows XP (https://support.microsoft.com/kb/817900)

2. RunMicrosoft Fix It tool and press “Accept”.

3. Select “Detect problems and apply the fixes for me (Recommended)” option.

4. Let the troubleshooter to fix USB problems and press “Next”.

If your problem is fixed, close the troubleshooter and check your USB devices functionality.

Solution 2: Diagnose & Solve USB problems with Windows Troubleshooter

1. Open “Troubleshooting” from Control Panel. To do that:

  1. Press “Windows” + “R” keys to load the Run dialog box.
  2. Type “control panel” and press Enter.

2. Change the “View By” option to “Small icons” and click “Troubleshooting”.

3. Under “Hardware and Sound” section, click “Configure a device”.

4. When Hardware and Devices troubleshooter appears on your screen, press “Next”.

5. When troubleshooter diagnose is completed, apply all fixes prompted and then check USB functionality.

Solution 3: Change USB Suspend settings.

1. Open Power Options from Control Panel. To do that:

  1. Press “Windows” + “R” keys to load the Run dialog box.
  2. Type “control panel” and press Enter.

2.Double-click to open “Power Options”.*

* Notice: If you don’t see “Power Options” change the “View By”: “Small Icons”.

3. Click “Change plan settings”.

4. Click “Change advanced power settings”.

5. At Advanced power settings, expand “USB Settings” and set “USB selective suspend setting” to “Disabled”.*

* Notice: For laptop computers you have to change this setting in both fields there: On Battery & Plugged in.

6. Press “OK” and restart your computer.

Solution 4: Change USB Power Management Settings.

1.Unplug all USB devices and open Device Manager. To do that:

  1. Press “Windows” + “R” keys to load the Run dialog box.
  2. Type “devmgmt.msc” and press Enter.

2. In device manager, double-click to expand “Universal Serial Bus controllers”.

3. Double-click to “USB Root Hub” to open its properties.

4. Click “Power Management”.

5.Uncheck (Deselect) the “Allow the computer to turn off this device to save power” option and press “OK”.

6. You must perform the same operation (steps 3, 4 & 5) for all “USB Root Hub” devices.

7. Close “Device Manager” and plug all your USB Devices again.

Solution 5: Install the latest Intel Drivers by using the Intel® Driver Update Utility.

1. Download the install the Intel® Driver Update Utility.

2. When the installation is completed, press the Start Scan button and let the program to detect and find the latest drivers for your Intel devices.

3. After scan, Download the drivers found.

4. Finally press Install and follow all the prompts, to install the latest Intel drivers found and restart your computer.

Solution 6: Completely Uninstall and Re-Install all Universal Serial Bus Controllers & USB Devices.

1.Unplug all USB devices and open Device Manager. To do that:

  1. Press “Windows” + “R” keys to load the Run dialog box.
  2. Type “devmgmt.msc” and press Enter.

2. In device manager, double-click to expand “Universal Serial Bus controllers”.

3.Right-click on every USB device found there and select “Uninstall”.

Drivers Medrx App

* Note: If you lose the connectivity with your USB Keyboard or the USB Mouse, during uninstall, then unplug & plug them again on the computer.

4.Restart your computer.

5. After restart wait until Windows automatically install all USB Serial Bus controllers again.

6. Now plug your USB devices (one by one) and see if your computer can recognize them properly and without errors.

Attention: At this point, if a USB device is still not recognized by Windows, then you must uninstall the specific USB device using Device Manager and install it again.

7. Uninstall USB unrecognized devices.

Example 1: If you plug your USB flash disk (USB Storage device) and it doesn't appear on Windows Explorer, then find this storage device in Device Manager and uninstall it. After uninstalling, unplug the storage device from your computer and plug it again.

Drivers Media

Example 2: If you plug your mobile phone (by using a USB cable) and it is not recognized by Windows, then find your mobile phone in Device Manager (usually it is under “Portable Devices) and uninstall it. After uninstalling, unplug the Mobile’s USB cable from your computer and plug it again.

Good Luck!

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