Marginal Costing Case Study

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Register to read the introduction… Knowledge of the ‘true’ cost is not only important in helping

us to identify opportunities for cost improvement but it also helps us to make strategic decisions that are better informed.
Activity-based costing focuses on indirect costs (overheads). It does this by making costs that would traditionally be considered indirect into direct costs. In effect, it traces costs and overhead expenses to an individual cost object. Activity-based costing is particularly useful when the overhead costs associated with a particular product are significant and where a number of products are manufactured in different volumes. Activity-based costing is particularly applicable where competition is severe and the margin of selling price over manufacturing cost has to be precisely determined.
The steps required to carry out activity-based costing are as follows:

(1) Identify the activities.
(2) Determine the cost of each activity.
(3) Determine the factors that drive costs.
(4) Collect the activity data.
(5) Calculate the product
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For all of these reason I have chosen the activity based costing for may company.
Suppose Padma Oil Company has decided to carry out activity-based costing of its two products: octane and petrol. The following table summarises the activity required for these two products:

Activity Octane Cost Petrol Cost Total (per unit) (£) (per unit) (£) )
Set-up 1 @ £25 000 25 000 1 @ £35 000 35 000 60 000

Manufacture 1500 @ £6 9000 500 @ £30 15 000 24 000

Assembly 1500 @ £2 3000 500 @ £10 5000 8000

Inspection 1500 @ £1 1500 500 @ £2 1000

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