Published in Operations and Supply Chain Terms by MBA Skool Team
What is Transaction based Costing?
It is done by classifying certain overhead activities into cost pools . Then individual drivers are assigned and proportion of resources consumed are used in calculating the total cost. Since labour hours which was used as a standard cost driver for all the activities now comprises of just 5-10 % of costs after mechanization . It becomes all the more in assigning proper drivers since labour hours are not related to the overheads incurred . Transaction based costing becomes even more important if the drivers are not quantifiable. It also helps in identifying the products or services which are consuming the higher costs.
Calculating the manufacturing overheads involved in operating machine . If the set up costs are found to be 20,000 and total overheads are 150 ,000
Total setup cost =150,000
The driver for the set up cost is the number of batches
No of batches = 500
Set up cost per batch = 300
In addition to this is the running cost
Overheads for running cost = Total overheads – Overheads for setup
=150 ,000- 20,000
The driver for running cost is machine hours = 2600 Hrs
Operating Cost per machine hour = 500
Total cost = Set up cost per batch + Operating Cost per machine hour = 300 +500 = 800
Hence, this concludes the definition of Transaction based Costing along with its overview.
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