5.6 Income statements – one unit
In activity-based costing (ABC), the income statement for one unit typically includes the direct costs associated with producing that unit as well as the allocated overhead costs based on the activity consumption.
Here’s a simplified example of an income statement for one unit using ABC:
Revenue from the sale of one unit
- Direct materials cost for one unit
- Direct labor cost for one unit
- Direct other costs (if applicable) for one unit = Gross margin
Allocated overhead costs:
- Activity 1 cost for one unit
- Activity 2 cost for one unit
- Activity 3 cost for one unit
- … = Total allocated overhead costs
Gross margin – Total allocated overhead costs = Operating income (or net income)
In ABC, the direct costs (such as direct materials, direct labor, and direct other costs) are typically easy to trace directly to the unit being produced. However, overhead costs are allocated based on the consumption of activities by the unit.
The allocation of overhead costs involves identifying the activities that consume resources and contribute to the production of the unit. The costs associated with these activities are allocated based on the proportionate usage of the identified cost drivers for each activity.
The income statement presented above includes the direct costs associated with producing one unit and the allocated overhead costs based on the consumption of activities. The difference between the revenue from the sale of one unit and the total costs (including direct costs and allocated overhead costs) gives the operating income or net income for that unit.
