Calculation Of Total Cost And Cost Drivers Accounting Essay


Colgate Palmolive was ab initio a little American household owned soap and taper concern. It has since widened its assortment of merchandises to unwritten attention, personal attention and family attention. The company expanded and has subordinates overseas including Malaysia. Colgate Palmolive enjoys planetary trade name trueness and is recognized as a taking family name whose chief end is to supply consumers with high quality merchandises that will fulfill their mundane demands.

Presently, the Board has suggested bettering Activity Based Management in the company. Activity-based Costing ( ABC ) has become one of today ‘s most prevailing attacks of costing by utilizing activities to apportion indirect costs and “ Activity-based Management ‘ ( ABM ) is a term created to intend the usage of ABC to better a concern. Therefore, the primary focal point of ABM is to pull off and command costs by pull offing activities. This study will concentrate on how ABM can supply accurate information for determination devising.

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4.0 Calculation of Entire Cost and Cost Drivers

Colgate-Palmolive Company has a fabrication concern in Malaysia bring forthing consumer merchandises for the Malayan market. The company has decided to concentrate on tooth coppice and tooth paste as the chief merchandises in a really competitory environment. Currently the direction of Colgate is utilizing ABC system to get at the merchandise cost. In the recent board run intoing the managers felt that betterment must be made to Activity Based Management in order to obtain a fairer and accurate merchandise cost to back up and supply a more dependable merchandising monetary value. The board has suggested that the direction should concentrate on the cost pool driver of each activity.

Datas for the two merchandises are: ( all the information is based on premise )


Monthly production

( units )

Labor hours

per unit

Machine hours

per unit

Material cost per unit ( ? )

Tooth coppice





Tooth paste





The labour rate is ?0.2 per hr.

The undermentioned information is for overhead assignment to an activity-based attack which the information is besides based on premise:

Activity cost pool

Estimated overhead cost per month ( ? )



Material handling


Production apparatus




Machine running costs



Tooth Brush

Tooth Paste

Batch size ( units )



Number of orders



Material motion per batch



Number of production tallies




Measure 1: Identify the company ‘s major activities, which is shown in the cost pool

Measure 2: Identify the factors which determine the size of the cost of an activity or do the cost of the activity. These are known as cost drivers. A cost driver is a factor which causes a alteration in the cost of an activity. ( Terry, 2002 )

For illustration:


Possible cost driver

Order costs

Number of orders

Material handling costs

Number of production tallies

Production programming costs

Number of production tallies

Dispatching costs

Number of despatchs

Measure 3: Allocate the cost associated with each cost driver into what are known as cost pools, In Colgate, the cost driver rate are calculated as follows:


Material movement= ( monthly production/batch sizes ) x Material motion per batch

Tooth brush= ( 4000/10 ) x 5=2000

Tooth paste = ( 6000/10 ) x 6=3600

Purchase= ?8,000/ ( 60+10 ) = ?114/order

Material handling= ?5,000/ ( 2000+3600 ) = ?0.89/movement

Production apparatus = ? 6,000/ ( 40+35 ) = ?80/production run

Inspection =?13,000/ [ ( 4000/10 ) + ( 6000/10 ) ] = ?1.3/batch

Machine running cost = ?16,000/ ( 4000×4+6000×2 ) = ?0.57/machine hr

Measure 4: Charge the premier cost and operating expense costs to merchandises on the footing of their use of the activity. A merchandise ‘s use of an activity is measured by the figure of the activity ‘s cost driver it generates. ( ACCA, 2009 ) In Colgate company, this is allocated as follows:


Tooth Brush ( ? )

Tooth Paste ( ? )

Material cost



Labor cost






Material handling



Production set-up






Machine running cost



Manufacturing cost



( ? ) Measure



Cost/ unit



ABC System used in Cost Leadership and Product Differentiation

In order for companies to last in today ‘s market, they need to hold competitory advantage over their challengers. A competitory advantage is normally gained over other rivals when companies offer consumers greater value by either offering lower monetary values or supplying excess benefits that justify similar or higher monetary values. ( Hunger & A ; Wheeler, 2010 )

The two types of competitory scheme as explained by Michael Porter are cost leading and distinction. Cost leading is the competitory scheme in which companies win by bring forthing at the lowest cost in the industry where as distinction is when companies win by developing and keeping a alone value for the merchandise as perceived by clients. ( Blocher, Stout, & A ; Cokins, 2008 )

One of Colgate Palmolive ‘s precedences is to hold a important competitory advantage by cut downing entire delivered cost and widening engineering resources. ( Colgate- Palmolive, 2012 ) Colgate Palmolive has an expansive diversified mix of merchandises with major merchandise countries being unwritten attention, personal attention and family attention. Colgate Palmolive has a robust trade name portfolio including trade names such as Colgate, Softsoap, Palmolive, Hill ‘s and Irish Spring. ( Colgate-Palmolive, 2012 ) One of the nucleus dogmas of its scheme is to construct these trade names through advertisement and selling attempts.

Ad and merchandise invention have shaped the base of the company ‘s concern scheme, enabling it to continue its place as the planetary market leader in unwritten attention while turn outing a formidable rival to other companies such as Unilever in the personal and place attention spheres. ( Forbes, 2012 )

Colgate Palmolive invests a brawny sum of its resources to consistently increase trade name equity and to that consequence has undertaken several enterprises to hike its trade name image among consumers and unwritten wellness attention professionals. This assists its unwritten attention trade names in the enlargement of their market portion and outselling other viing trade names. For illustration, Colgate-Palmolive Malaysia is the first international corporation to hold obtained the Malayan Halal Certification for its toothpaste and gargle merchandises sold to consumers. The Halal Certification extends a new degree of consumer confidence, assurance and satisfaction. This besides respects the imposts and values of consumers in the state. Additionally, Colgate Palmolive signifiers partnerships with dental attention professionals to non merely offer unwritten wellness instruction but provide dental showings and free samples to consumers to promote the use of unwritten attention. ( Colgate Palmolive, 2012 )

Colgate ‘s Technology Centers around the universe are dedicated to bettering unwritten wellness through the development of leading-edge engineerings that achieve the highest criterions of merchandises every bit good as patient attention and safety. ( Colgate- Palmolive, 2012 ) Colgate Palmolive positions merchandise invention as a critical scheme to drive growing and increase market portion. Consistent merchandise invention and launch of quality priced merchandises have ensured that Colgate expand its gross revenues while at the same aid support its market portion from lower-priced trade names. Additionally, the typical characteristics of these merchandises allow for higher pricing, which favourably impacts borders. Colgate Palmolive has a better opportunity of deriving higher market portion as compared to other planetary participants in Asia due to the fact that it offers an full portfolio of unwritten attention runing frm gargles, toothpaste and toothbrushes etc. ( Trefis, 2012 )

One of the ways in which a company can hold a low cost border over its challengers is to execute indispensable value ironss and revamp value ironss to extinguish costs and cut down waste. ( Charles, 2011 ) Harmonizing to Colgate Palmolive, the one country is which a consumer merchandises company can be steadfastly in charge of its ain internal concern is cost control. To that consequence, Colgate Palmolive Asia rolled out a system called Project Dragon in 2007 aimed at extinguishing waste and contorting out costs by utilizing the same machine-controlled system throughout Asia. ( Witton, 2000 )

Cost leading and merchandise distinction are hence two of import factors needed to retain and increase market portion and aid companies become cost leaders in the market.

Advantages of utilizing ABC system:

Activity Based Costing helps to better cost control, and at the same clip acquire a more accurate cost of merchandises and merchandise lines. In add-on to the direct stuffs, direct labour straight imputation merchandises, fabrication costs were besides the work activities imputation to the homogeneousness of the cost driver, so take sensible cost pool allotment standards, the fabricating cost-sharing in the cost driver, thereby increasing the cost can be attributed prompted directors to re-work activities on the design of the full value concatenation, and acquire more accurate cost projections.

Second, Activity Based Costing will give support of strategic direction information. Cost control affects the strategic decision-making, which the finding of merchandise monetary values and production scope every bit good as merchandise construction finding. Under the new merchandise construction, direct labour and merchandise cost in proportion dropped significantly, and merely 3 % -8 % , ensuing in a figure of cost computation manner can non be adapted to the existent demands. Alternatively, Activity Based Costing sing the complexness of the production costs, elaborate traceability and allotment of resources consumed, moreover, production determinations, and therefore supply a proper footing for pricing determinations.

Activity Based Costing provides a new public presentation measuring and assessment methods. Activity Based Costing in add-on to those who have the fiscal indexs reserved besides offers a figure of non-financial indexs, such as labour productiveness, merchandise quality, market portion, direction capacity, human resources direction. In add-on, the usage of a specific occupation information, the value-added operation efficiency can be increased to avoid invalid operations, optimize runing concatenation and value concatenation, increase client value, supply seasonably and utile information, the loss, waste is reduced to the lower limit, to better decision-making, computation, control and effectivity, better market fight and profitableness of the endeavor to increase corporate value.


Based on the above research, it can be concluded that activity based direction is an of import instrument of direction that has allowed Colgate Palmolive to accurately mensurate the public presentation of activities and cost drivers. The application of the ABC system in its procedures is in line with the company ‘s aim of being the taking supplier of unwritten, personal and family attention in the Malayan market. Cost leading and merchandise distinction have propelled the company to supply high quality merchandises and


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