Essay: Activity Based Costing-Indirect Cost Example

Sample Essay

For instance, if maintenance costs increase by $3 million, handling costs increase by $1.5 million and costs of increased inspection hours increase by $ 0.4 million, it may follow that the costs allocated to Boeing 737 are as follows:

Maintenance costs = 80%* 3 million = $2.4 million

Handling costs = 70%*1.5 million = $1.05 million

Inspection hours costs = 65%*$0.4 million = $0.26 million

The remaining percentages will be proportionately allocated to the other products in very small amounts. It is notable that by the use of Activity Based Costing, the correct percentages will be allocated to the right products, the products that resulted to their incurrence.

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