Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 58

Activity-Based Costing in the Fashion Apparel Industry Fashion House, a manufacturer of high- fashion clothing for women, is located in South London. Its product line consists of trousers (45 percent), skirts (35 percent) , dresses (15 percent), and other (5 percent). Fashion House has been using a volume-based rate to assign overhead to each product; the rate it uses is £2.25 per unit produced. The results for the trousers line, using the volume-based approach are as follows:

Number of units produced	10,000
Price (all figures in £)	20.525
Total revenue	205,250
Direct materials	33,750
Direct labor	112,500
Overhead (volume-based)	22,500
Total product cost	168,750
Nonmanufacturing expenses	31,500
Total cost	200,250
Profit margin for trousers	5,000

Recently, it has conducted a further analysis of the trousers line of product, using ABC. In the study, eight activities were identified, and direct labor was assigned to the activities. The total conversion cost (labor and overhead) for the eight activities, after allocation to the trousers line, is as follows:

Pattern cutting	£ 22,000
Grading	19,000
Lay planning	18,500
Sewing	21,000
Finishing	14,300
Inspection	6,500
Boxing up	3,500
Storage	7,000

Required Determine the profit margin for trousers using ABC and comment on the difference in comparison to the volume-based calculations. Is Fashion House more likely to use ABC as a U.K. company than a similar company in France or the U.S. (refer to real world focus boxes in the chapter)?

Step 1 of 3

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.