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Home /  Activity Based Costing
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  • Estimated reading time : 714 Minutes
  • Activity Based Costing | TU Questions | Traditional Costing

  • Arjun EP
  • Published on: April 1, 2022

  •   

     

    Activity Based Costing | TU Questions | Traditional Costing | Total Cost | Cost Per Unit

    Activity Based Costing, TU Solution contents numerical problems and solution with clear working notes.

    Manufacturing company prepares cost statement as per traditional costing system and activity based costing.  

    Direct materials and direct labour are recorded for prime cost.

    There are two methods to calculate cost per unit.

    Machine hour rate or labour hour rate is used for traditional costing system.

    Cost tools are used to find out cost driver rate.

    Overheads are calculated on the basis of cost driver rate in activity based costing.

     

     

    Traditional Costing System | Conventional Costing

    [Conventional costing system, absorption costing system, volume based costing system]

    The tradition costing system was designed decades ago for costing.

    There are two types of distribution under traditional costing system.

    They are primary and secondary distribution of overhead.

    Under primary costing, direct materials, direct labour and direct overhead are calculated.

    Under secondary costing, labour hour based or machine hour based overhead are calculated.

     

     

    Activity Based Costing | Concept of ABC

    Direct materials and direct labour are the major elements of traditional cost accounting system.

    The traditional system is suitable for those companies who produce goods in narrow range.

    If company produces wide range of goods, overhead cost will be relatively higher to the direct cost.

    And it may be difficult to allocation (share) fixed cost.

     

    Activity based cost (ABC) was introduced by Robin Cooper in 1980 to resolves the difficulties of assigning overhead amount under traditional costing.

    Then Robert S. Kaplan recommended it in 1988; it is recommended for:

    ·          A wide range of products

    ·          Product costing and profitability

    ·          Distribution and controlling overheads appropriately (properly)

     

    ABC helps to better understanding about overhead cost.

    It helps to allocation overheads in systematic and scientific way.

    Activities are transaction, events, tasks or unit of work for producing goods.

    ABC is also called transaction based costing.

     

    Cost driver | Cost indicator | Cost pools  

    SN

    Activities or Transactions

    Cost Drivers

    1.

    Material procurement, Order execution

    No. of order

    2.

    Material handling

    No. of order executed, No. of movement

    3.

    Store

    No. of batch, Requisition raised

    4.

    Materials handling and dispatch

    Order executed, No. materials component, volume

    5.

    Dispatch of goods

    No. of dispatches

    6.

    Schedule cost, set up cost

    Production runs

    7.

    Materials inspections

    No. of inspections

    8

    Repair and maintenance, short term variable cost

    Machine hours

    9.

    Power

    Horse power

    10.

    Production scheduling

    No. of production scheduling

    11.

    Engineering cost

    No. of set up, No. of product change, No. of tool change

     

     

     

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    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2054/Cancelled, Q: 7

    A Manufacturing Company applying activity based costing system provides you the following details about the cost and cost drivers:

    Items

    Cost in Rs

    Cost drivers

    Procurement cost

    20,000

    No. of order

    Repairs

    60,000

    Machine hours

    Set up cost

    18,000

    No. of production run

    Output and related activities are as follows:

    Products

    Output units

    No. of order

    Machine hours used

    No. of production run

    A

    10,000

    40

    15,000

    3

    B

    20,000

    60

    15,000

    6

    Required: Overhead rate per unit

    [Answer: Total cost: A = Rs 44,000; B = Rs 54,000;

    Overhead rate: A = Rs 4.40; B = Rs 2.70] *CDR = 200; 2; 2,000

    SOLUTION:

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Procurement cost

    20,000

    No. of order

    100

    200

    Repairs

    60,000

    Machine hours

    30,000

    2

    Set up cost

    18,000

    No. of production run

    9

    2,000

     

    Cost Statement under Activities Based Costing

    Particulars

    A = 10,000

    B = 10,000

    Direct materials

    ××××

    ××××

    Direct labour

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Procurement cost

    [No. of order × Rs 200]

    8,000

    12,000

    Repairs

    [Machine hours × Rs 2]

    30,000

    30,000

    Set up cost

    [No. of production run × Rs 2,000]

    6,000

    12,000

    Total overhead

    Rs 44,000

    Rs 54,000

    Output

    10,000

    20,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 4.40

    Rs 2.70

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2055, Q: 11

    A Manufacturing Company manufactures two products by using similar equipment and methods.

    (i) Details of two products and relevant information are given below:

    Particulars

    Product P1

    Product P2

    Actual output in units

    3,000

    5,000

    Machine hours per units

    3

    2

    Labour hour per unit

    1

    2

     

    (ii) Overhead for the period:

    Machine related activity Rs 38,000

    Production set up activity Rs 14,000

     

    (iii) The number of set ups in the product P1 and P2 were 8 and 6 respectively.

    Required: Total cost for each product if overhead rate per unit is absorbed in:

    (a) Labour hour absorbed rate; (b) Activity based costing by using suitable cost drivers

    [Answer: (a) Total overhead: A = Rs 12,000; B = Rs 40,000;

    Overhead per unit: A = Rs 4; B = Rs 8;

    (b) Total overhead: A = Rs 26,000; B = Rs 26,000;

    Overhead per unit: A = Rs 8.67; B = Rs 5.20] *CDR: 2; 1,000

    SOLUTION:

    Given and working note:

    Labour hours

    = Output × LHPU

     

    Labour hour rate

    P1

    = 3,000 × 1

    = 3,000

    = Total overhead ÷ Total labour hours

    P2

    = 5,000 × 2

    = 10,000

    = (Rs 38,000 + 14,000) ÷ 13,000

     

    Total

    = 13,000

    = Rs 4

     

     

     

     

    Machine hours

    = Output × MHPU

     

    No. of set ups

    P1

    = 3,000 × 3

    = 9,000

    = P1 + P2

    P2

    = 5,000 × 2

    = 10,000

    = 8 + 6

     

    Total

    = 15,000

    = 14

     

     

     

     

    Cost Statement under Traditional Costing

    Particulars

    P1 = 3,000

    P2 = 5,000

    Materials           

    ××××

    ××××

    Labour               

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overheads: (based on LH)          [DLH × LH rate]

    12,000

    40,000

    Total overhead

    Rs 12,000

    Rs 40,000

    Output

    3,000

    5,000

    Overhead per unit = Total overhead ÷ Output

    Rs 4

    Rs 8

     

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Machine related activity

    38,000

    Machine hours

    19,000

    2

    Production set up activity

    14,000

    No. of set ups

    14

    1,000

     

     

    Cost Statement under Activities Based Costing

    Particulars

    P1 = 3,000

    P2 = 5,000

    Direct materials

    ××××

    ××××

    Direct labour

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Machine related activity

    [Machine hours × Rs 2]

    18,000

    20,000

    Production set up activity

    [No. of set up × Rs 1,000]

    8,000

    6,000

    Total overhead

    Rs 26,000

    Rs 26,000

    Output

    3,000

    5,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 8.67

    Rs 5.20

     

     

     

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    ######

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2056, Q: 10

    A Manufacturing Company has a single production process. Three products P, Q and R are produced by the workers. The wage rate per hour is Rs 4. The budget information have been obtained for the year are as follows:

    Products

    Production

    Materials

    Material cost

    Labour hour

    Machine hour

    Batches

     

    units

    per unit

    Per unit

    Per unit

    Per unit

     

    P

    2,000

    2

    Rs 3

    0.50 hour

    1.00 hour

    6

    Q

    1,000

    3

    Rs 5

    0.25 hour

    0.25 hour

    5

    R

    500

    4

    Rs 2

    1.00 hour

    1.50 hours

    4

    Total overhead cost and related cost drivers are:

    Overheads

    Cost drivers

    Amount (Rs)

    Materials receipt and inspections

    No. of batches

    30,000

    Materials handling

    Quantity of materials

    18,000

    Short-term variable cost

    Machine hours

    6,000

    Required: By using activity base costing, find out: (a) Cost driver rate; (b) Total cost for each product; (c) Cost per unit

    [Answer: (a) CDR = 2,000; 2; 2;

    (b) Total cost: P = Rs 14,000; Q = Rs 22,500; R = Rs 16,500;

    (c) CPU: P = Rs 17; Q = Rs 22.50; R = Rs 33]

    SOLUTION:

    Given and working note for cost driver:

    No. of batches

    Labour hour = Output × LHPU

    = P + Q + R

    P

    = 2,000 × 0.5 hour

    = 1,000

    = 6 + 5 + 4

    Q

    = 1,000 × 0.25 hour

    =   250

    = 15

    R

    = 500 × 1 hour

    =   500

     

     

     

    = 2,000

     

     

     

     

    Machine hour = Output × MHPU

    Quantity of materials = Output × Material per unit

    P

    = 2,000 × 1 hour

    = 2,000

    P

    = 2,000 × 2

    = 4,000 units

    Q

    = 1,000 × 0.25 hour

    =   250

    Q

    = 1,000 × 3

    = 3,000 units

    R

    = 500 × 1.50 hours

    =  750         

    R

    = 500 × 4

    = 2,000 units

     

     

    = 3,000

     

     

    = 9,000

                 

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Materials receipt and inspections

    30,000

    No. of batches

    15

    2,000

    Materials handling

    18,000

    Quantity of materials

    9,000

    2

    Short-term variable cost

    6,000

    Machine hours

    3,000

    2

     

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    P = 2,000

    Q = 1,000

    R = 500

    Materials                  [Output × MCPU]

    6,000

    5,000

    1,000

    Labour                       [Output × LHPU × Rs 4]

    4,000

    1,000

    2,000

    Prime cost

    10,000

    6,000

    3,000

    Add: Overheads (based on ABC):

     

     

     

    Materials receipt and inspections

    [No. of batches × Rs 2,000]

    12,000

    10,000

    8,000

    Materials handling

    [Qty of materials × Rs 2]

    8,000

    6,000

    4,000

    Short-term variable cost

    [Machine hour × Rs 2]

    4,000

    500

    1,500

    Total cost

    Rs 34,000

    Rs 22,500

    Rs 16,500

    Output

    2,000

    1,000

    500

    Cost per unit  (CPU) = Total cost ÷ Output

    Rs 17.00

    Rs 22.50

    Rs 33.00

     

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2058, Q: 10

    A Manufacturing Company manufactures two products namely X and Y. Data for the past period are as follows:

    Particulars

    Product X

    Product Y

    Output in units

    2,000

    3,000

    Machine hours per unit

    2 hours

    1 hour

    Labour hours per unit

    2 hours

    3 hours

    Production runs

    7

    3

     

    Total production overhead recorded and cost driver fixed by the cost accounting department is analysed as:

    Cost

    Cost drivers

    Amount

    Set up cost

    Production runs

    20,000

    Machine department

    Machine hours

    14,000

    Scheduling cost

    Production runs

    + 18,000

     

     

    Total 52,000

    Required: (a) Overhead rate by using labour rate; (b) Overhead rate under ABC

    [Answer: (a) Total overhead: X = Rs 16,000; Y = Rs 36,000; CPU: X = Rs 8; Y = Rs 12;

    (b) Total overhead: X = Rs 34,600; Y = Rs 17,400; CPU: X = Rs 17.30; Y = Rs 5.30]

    *CDR = Rs 2,000; Rs 2; Rs 1,800]

    SOLUTION:

    Given and working note:

    Labour hours

    = Output × LHPU

     

    Labour hour rate (LHR)

    X

    = 2,000 × 2

    = 4,000

    = Total overhead ÷ Total labour hours

    Y

    = 3,000 × 3

    = 9,000

    = Rs 52,000 ÷ 13,000

     

    Total

    = 13,000

    = Rs 4

     

     

     

     

    Machine hours

    = Output × MHPU

     

    Production runs  

    X

    = 2,000 × 2

    = 4,000

    = X + Y

    Y

    = 3,000 × 1

    = 3,000

    = 7 + 3

     

    Total

    = 7,000

    = 10

     

     

     

     

    Cost Statement under Traditional Costing

    Particulars

    X = 2,000

    Y = 3,000

    Materials           

    ××××

    ××××

    Labour               

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overheads: (based on LH)          [DLH × LHR]

    16,000

    36,000

    Total overhead

    Rs 16,000

    Rs 36,000

    Output

    2,000

    3,000

    Overhead per unit = Total overhead ÷ Output

    Rs 8

    Rs 12

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Set up cost

    20,000

    Production runs

    10

    2,000

    Machine department

    14,000

    Machine hours

    7,000

    2

    Scheduling cost

    18,000

    Production runs

    10

    1,800

     

     

    Cost Statement under Activities Based Costing

    Particulars

    X = 2,000

    Y = 3,000

    Direct materials

    ××××

    ××××

    Direct labour

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Set up cost

    [Production runs × Rs 2,000]

    14,000

    6,000

    Machine department

    [Machine hours × Rs 2]

    8,000

    6,000

    Scheduling cost

    [Production runs × Rs 1,800]

    12,600

    5,400

    Total overhead

    Rs 34,600

    Rs 17,400

    Output

    2,000

    3,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 17.30

    Rs 5.30

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2059, Q: 10

    A Manufacturing Company produces two types of products. The president of the company recently decided to change from a volume based costing system to an activity based costing system. To assess the effect of the change, the following data have been gathered:

    Products

    Units

    Machine hours

    Production runs

    Prime cost

    Materials components

    A

    3,000

    9,000

    10

    Rs 10,000

    6,000

    B

    2,000

    4,000

    5

    Rs 8,000

    8,000

    Total

     

    13,000

    15

     

    14,000

     

    The overhead cost and cost drivers are as follows:

    Cost

    Cost drivers

    Amount

    Machine related activities

    Machine hours

    39,000

    Set up costs

    Production runs

    30,000

    Materials handling cost

    No. of material components

    + 28,000

     

     

    Total 67,000

    Required: (a) Cost driver rate for each item by using ABC; (b) Total cost of each product by using cost driver rate

    [Answer: (a) CDR = Rs 3; Rs 2,000; Rs 2; (b) TC: A = Rs 69,000; B = Rs 46,000;

    CPU = A = Rs 23; B = Rs 23]

    SOLUTION:

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Machine related activities

    39,000

    Machine hours

    13,000

    3

    Set up costs

    30,000

    Production runs

    15

    2,000

    Materials handling cost

    28,000

    No. of material components

    14,000

    2

     

     

    Cost Statement under Activities Based Costing

    Particulars

    A = 3,000

    B = 2,000

    Direct materials

    ××××

    ××××

    Direct labour

    ××××

    ××××

    Prime cost (given)

    10,000

    8,000

    Add: Overhead (based on ABC)

     

     

    Machine related activities

    [Machine hours × Rs 3]

    27,000

    12,000

    Set up costs

    [Production runs × Rs 2,000]

    20,000

    10,000

    Materials handling cost

    [No. of material components × Rs 2]

    12,000

    16,000

    Total overhead

    Rs 69,000

    Rs 46,000

    Output

    3,000

    2,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 23

    Rs 23

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    2060/Second, Q: 8

    A Company manufactures three products P1, P2 and P3 using the same equipment and process. The following information relates to a production period:

    Particulars

    P1

    P2

    P3

     

    Units (produced)

    3,000

    2,000

    1,000

     

    Labour hour per unit

    2

    2

    2

     

    Machine hour per unit

    4

    2

    2

     

    Set-up In numbers

    8

    5

    2

     

    Order handled In period

    6

    4

    3

     

    Direct labour rate per hour

    Rs 4

    Rs 3

    Rs 2

     

    Direct material per unit

    Rs 16

    Rs 18

    Rs 24

     

    The overheads for the period are:

    Production set-up costs Rs 60,000

    Material handling and dispatch Rs 26,000

    Repair and maintenance Rs 9,000

    Required: (1) Cost driver rate for each overhead

    (2) Statement of total cost showing per unit for each product by using activity-based costing.

    [Answer: (1) Cost Driver Rate = Rs 4,000; Rs 2,000; Re 0.50;

    (2) Total cost = Rs 122,000; Rs 78,000; Rs 43,000;

    CPU= Rs 40.67; Rs 39; Rs 43]

    SOLUTION

    Given and working note for cost driver:

    No. of set ups

    No. of order handling

    = P1 + P2 + P3

    = P1 + P2 + P3

    = 8 + 5 + 2

    = 6 + 4 + 3

    = 15

    = 13

     

     

    Machine hour = Output × MHPU

     

    P1

    = 3,000 × 4 hours

    = 12,000

     

    P2

    = 2,000 × 2 hours

    =   4,000

     

    P3

    = 1,000 × 2 hours

    = +2,000         

     

     

    = 18,000

     

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    Cost Driver Rate

    Production set up

    60,000

    Set up

    15

    4,000.00

    Materials handling

    26,000

    Order handling

    13

    2,000.00

    Repairs and maintenance

    9,000

    Machine hour

    18,000

    0.50

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    P1=3,000

    P2=2,000

    P3=1,000

    Materials                  [Output × MCPU]

    48,000

    36,000

    24,000

    Labour                       [Output × LHPU × Rs ]

    24,000

    12,000

    4,000

    Prime cost

    72,000

    48,000

    28,000

    Add: Overheads (based on ABC):

    .

    .

    .

    Production set up

    [Set up × Rs 4,000]

    32,000

    20,000

    8,000

    Materials handling

    [Order handling × Rs 2,000]

    12,000

    8,000

    6,000

    Repairs and maintenance

    [Machine hour × Re 0.5]

    6,000

    2,000

    1,000

    Total cost

    Rs 122,000

    Rs 78,000

    Rs 43,000

    Output

    3,000

    2,000

    1,000

    Cost per unit  (CPU) = Total cost ÷ Output

    Rs 40.67

    Rs 39.00

    Rs 43.00

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2061, Q: 7 Or

    A Company has a single production process and it manufacturing three products A, B and C. The overhead costs and related cost driver for a period are:

    Overhead costs

    Cost drives

    Amount

    Short term variable costs

    Machine hours

    16,000

    Welfare expenses

    Direct labour hours

    36,000

    Set-up costs

    Production runs

    8,000

    Material handling

    Quality of materials

    24,000

     

    Data for the period are:

    Products

    A

    B

    C

    Output in units

    2,000

    2,000

    1,000

    Materials per unit

    3

    2

    2

    Labour hour per unit

    2

    3

    2

    Machine hour per unit

    2

    1.5

    2

    Production run for the period

    4

    2

    2

    Required: (i) Overhead rate by using machine hour rate; (ii) Overhead rate by using activity based costing

    [Answer: (i) Total overhead: Rs 37,333; Rs 28,000; Rs 18,667;

    OHR: Rs 18.67; Rs 14 and Rs 18.67;

    (ii) Total overhead: Rs 35,111; Rs 33,333; Rs 15,556;

    OHR: Rs 17.56; Rs 16.67 and Rs 15.56]

    SOLUTION

    Given and working note: 

    Machine hours = Output × MHPU

    Machine hour rate           

    A

    = 2,000 units × 2 hours

    = 4,000

    = Total overhead (given) ÷ Total MH  

    B

    = 2,000 units × 1.5 hours

    = 3,000

    = Rs 84,000 ÷ 9,000 hours

    C

    = 1,000 units × 2 hours

    = 2,000

    = Rs 28/3 or 9.333

                                        Total

    = 9,000*

     

     

     

    Cost Statement under Traditional Costing

    Particulars

    A

    B

    C

    Materials           

    ××××

    ××××

    ××××

    Labour               

    ××××

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Nil

    Add: Overheads (based on MH) [MH × MH rate]:

    37,333

    28,000

    18,667

    Total overhead

    Rs 37,333

    Rs 28,000

    Rs 18,667

    Output

    2,000

    2,000

    1,000

    Overhead per unit = Total overhead ÷ Output

    Rs 18.67

    Rs 14.00

    Rs 18.67

     

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Short term variance

    16,000

    Machine hour

    9,000*

    16/9

    Welfare expenses

    36,000

    Direct labour hour

    12,000

    3.00

    Set up cost

    8,000

    Production runs

    8

    1,000.00

    Materials handling

    24,000

    Quantity of materials

    12,000

    2.00

     

    Given and working note for cost driver:

    Direct labour hour = Output × DLHPU

    Production runs

    A

    = 2,000 units × 2 hours

    = 4,000

    = A + B + C

    B

    = 2,000 units × 3 hours

    = 6,000

    = 4 + 2 + 2

    C

    = 1,000 units × 2 hours

    = 2,000

    = 8

     

    Total

    = 12,000

     

     

     

    Qty of materials = Output × MPU

     

    A

    = 2,000 units × 3

    = 6,000

     

    B

    = 2,000 units × 2

    = 4,000

     

    C

    = 1,000 units × 2

    = 2,000

     

     

    Total            

    = 12,000

     

               

     

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    A

    B

    C

    Materials                     

    ××××

    ××××

    ××××

    Labour                                                    

    ××××

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Nil

    Add: Overheads (based on ABC)

     

     

     

    Short term variance

    [Machine hour × Rs 16/9]

    7,111

    5,333

    3,556

    Welfare expenses

    [Direct labour hour × Rs 3]

    12,000

    18,000

    6,000

    Set up cost

    [Production runs × Rs 1,000]

    4,000

    2,000

    2,000

    Materials handling

    [Quantity of materials × Rs 2]

    12,000

    8,000

    4,000

    Total overhead

    Rs 35,111

    Rs 33,333

    Rs 15,556

    Output

    2,000

    2,000

    1,000

    Overhead per unit  = Total overhead  ÷ Output

    Rs 17.56

    Rs 16.67

    Rs 15.56

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2061/second, Q: 7

    The following are the particulars of an industry that manufactures two products:

    Particulars

    PX

    PY

    Output in units

    4,000

    6,000

    Labour hour per unit

    3/4

    1/2

    Number of production run

    20

    30

    Number of supervision per production run

    4

    5

    Machine hour per unit

    1.5

    1

     

    The expenses incurred for the realization of the above output are as follows:

    Overheads:

    Production setting

    Supervision

    Machine operation

    Amount:

    Rs 25,000

    Rs 23,000

    Rs 24,000

    Required: (1) Overhead rate per unit traditional costing; (2) Overhead rate per unit activity based costing

    [Answer: (1) Total overhead: Rs 36,000 and Rs 36,000; OPU = Rs 9 and Rs 6;

    (2) Total overhead: Rs 30,000 and Rs 42,000; OPU = Rs 7.50 and Rs 7;

    Supervision = No. of supervision x No. of Production runs]

    SOLUTION

    Given and working note:

    Labour hours = Output × Labour hours per unit

    Labour hours rate

    X

    = 4,000 × 3/4 hour

    = 3,000

    = Total overhead ÷ Total labour hours

    Y

    = 6,000 × 1/2 hour

    = 3,000

    = Rs 72,000 ÷ 6,000 hours

                Total

    = 6,000 hours

    = Rs 12 per hour

     

     

    Cost Statement under Traditional Costing

    Particulars

    X

    Y

    Materials           

    ××××

    ××××

    Labour               

    ××××

    ××××

    Prime cost

    ××××

    ××××

    Add: Overheads: (based on LH)          [DLH × LH rate]

    36,000

    36,000

    Total overhead

    Rs 36,000

    Rs 36,000

    Output

    4,000

    6,000

    Overhead per unit = Total overhead ÷ Output

    Rs 9

    Rs 6

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Production setting

    25,000

    Production runs

    50

    500

    Supervision

    23,000

    No. of supervision

    230

    100

    Machine operated

    24,000

    Machine hour

    12,000

    2

     

     

    Given and working note for cost driver:

    Production runs    

    No. of supervision

    = Supervision × Production runs

     

    = X + Y

    X

    = 4 × 20

    =   80

    = 20 + 30

    Y

    = 5 × 30

    = 150

    = 50

     

    Total

    = 230

     

     

    Machine hour

    = Output × MHPU

     

     

    X

    = 4,000 × 1.5

    = 6,000

     

    Y

    = 6,000 × 1

    = 6,000

     

     

    Total

    = 12,000

     

     

    Cost Statement under Activities Based Costing

    Particulars

    X

    Y

    Direct materials

    ××××

    ××××

    Direct labour

    ××××

    ××××

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Production setting

    [Production runs × Rs 500]

    10,000

    15,000

    Supervision

    [No of supervision             × Rs 100]

    8,000

    15,000

    Machine operated

    [Machine hours × Rs 2]

    12,000

    12,000

    Total overhead

    Rs 30,000

    Rs 42,000

    Output

    4,000

    6,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 7.5

    Rs 7.0

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

    2062, Q: 7 Or

    The summarized production and cost figures of a workshop are provided below:

    Products

    Output

    in pieces

    Material cost per piece

    Labour hour

    per piece

    Production scheduling

    per 50 pieces

    Jar

    400

    Rs 25

    5

    3

    Plate

    600

    Rs 30

    2.5

    3

    Bowl

    500

    Rs 20

    3

    4

    Wage rate per hour is Rs 4

    All production require five inspections in a lot of 25 pieces of each

    One sales order execution contains 100 pieces of each.

    The overhead for the period are outlined below:

    Production scheduling

    Rs 20,000

    Order execution expenses

    Rs 15,000

    Inspection work expenses

    Rs 18,000

    Required: (a) Total cost and cost per piece based on Traditional Costing;

    (b) Total cost and cost per piece based on Activity Based Costing 

    [Answer: (a) Total cost = Rs 39,200; Rs 39,900; Rs 31,900;

    CPU = Rs 98; Rs 66.50; Rs 63.80;

    (b) Total cost = Rs 31,600; Rs 44,400; Rs 35,000;

    SOLUTION

    Given and working note: 

    Direct labour hour (DLH) = Output × LHPU

    DLH rate

    = Total overhead ÷ Total DLH

    Jar      = 400 × 5

    = 2,000

     

    = Rs 53,000 ÷ 5,000 hours

    Plate  = 600 × 2.5

    = 1,500

     

    = Rs 10.60 per hour

    Bowl   = 500 × 3

    = 1,500

     

     

                            Total

    = 5,000 hours

     

     

     

     

    Cost Statement under Traditional Costing

    Particulars

    Jar

    Plate

    Bowl

    Direct Materials            [Output × MCPU]

    10,000

    18,000

    10,000

    Direct Labour                [Output × LHPU × Rs 4]

    8,000

    6,000

    6,000

    Prime cost

    18,000

    24,000

    16,000

    Add: Overhead (based on labour hours, Output × Rs 10.60)

    21,200

    15,900

    15,900

    Total cost

    Rs 39,200

    Rs 39,900

    Rs 31,900

    Output

    400

    600

    500

    Cost per unit  = Total cost ÷ Output

    Rs 98.00

    Rs 66.50

    Rs 63.80

     

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total Cost Driver

    CDR

    Production scheduling

    20,000

    Production schedule

    100

    200

    Order execution

    15,000

    Order execution

    15

    1,000

    Inspection work

    18,000

    No. of inspection

    300

    60

     

    Given and working note for cost driver:

    Production schedule

    Order execution

    50 pieces needed

    = 3 Production run

    100 pieces needed

    = 1 order

     

    400 jars need

    = 3 × 400 ÷ 50

    = 24

    400 jars need

    = 400 ÷ 100

    = 4

    600 plate need

    = 3 × 600 ÷ 50

    = 36

    600 plate need

    = 600 ÷ 100

    = 6

    500 bowl need

    = 4 × 500 ÷ 50

    = 40

    500 bowl need

    = 500 ÷ 100

    = 5

     

    Total

    = 100

     

    Total

    = 15

     

     

    No. of inspection

     

    25 pieces needed

    = 5 inspection

     

     

    400 jars need

    = 5 × 400 ÷ 25

    =   80

     

    600 plate need

    = 5 × 600 ÷ 25

    = 120

     

    500 bowl need

    = 5 × 500 ÷ 25

    = 100

     

     

    Total

    = 300

     

                   

     

    Cost Statement under Activities Based Costing

    Particulars

    Jar

    Plate

    Bowl

    Direct Materials                  [Output × MCPU]

    10,000

    10,000

    18,000

    Direct Labour                      [Output × LHPU × Rs 4]

    8,000

    8,000

    6,000

    Prime cost

    18,000

    24,000

    16,000

    Add: Overhead (based on ABC)

     

     

     

    Schedule costing

    [Production runs × Rs 200]

    4,800

    7,200

    8,000

    Order execution

    [Order execution × Rs 1,000]

    4,000

    6,000

    5,000

    Inspection work

    [No. of inspection × Rs 60]

    4,800

    7,200

    6,000

    Total cost

    Rs 31,600

    44,400

    35,000

    Output

    400

    600

    500

    Cost per unit  = Total cost ÷ Output

    Rs 79

    Rs 74

    Rs 70

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    2063, Q: 8

    The following data pertain to a company which manufacturing two products X and Y:

     

    Product X

    Product Y

    Output In units

    500

    1,000

    Machine hour per unit

    4

    2

    Direct labour hour per unit

    2

    2

    Production run for the period

    5

    8

    The overhead for the period and cost drives are:

    Cost items

    Amount

    Cost drives

    Short term variable costs

    16,000

    Machine hours

    Scheduling costs

    10,400

    Production runs

    Set up costs

    5,200

    Production runs

    Indirect labour

    9,000

    Direct labour hours

    Required: (1) Cost driver rate for each item of overhead

    (2) Total overhead costs and overhead per unit for each product by using ABC System

    [Answer: (1) CDR = Rs 4, Rs 800, Rs 400 and Rs 3;

    (2) Total cost = Rs 17,000 and Rs 23,600; OPU = Rs 34 and Rs 23.6]

    SOLUTION

    Calculation of Cost Driver Rate

    Activities                                 

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    Short term variable cost

    16,000

    Machine hours

    4,000

    4

    Scheduling cost

    10,400

    Production runs

    13

    800

    Set up cost

    5,200

    Production runs

    13

    400

    Indirect labour 

    9,000

    Direct labour hour

    3,000

    3

     

    Given and working note for cost driver:

    Machine hour

    = Output × MHPU

     

    DLH

    = Output × DLHPU

     

    X

    = 500 × 4 hours

    = 2,000

    X

    = 500 × 2 hours

    = 1,000

    Y

    = 1,000 × 2 hours

    = 2,000

    Y

    = 1,000 × 2 hours

    = 2,000

     

    Total

    =  4,000

     

    Total

    = 3,000

     

     

    Production runs

     

    = X + Y

     

    = 5 + 8

     

    = 13

     

     

     

    Cost Statement under Activities Based Costing

    Particulars

    A

    B

    Direct Materials

     

     

    Direct Labour

     

     

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Short term variable cost

    [Machine hours × Rs 4]

    8,000

    8,000

    Schedule costing

    [Production runs × Rs 800]

    4,000

    6,400

    Set up cost

    [Production runs × Rs 400]

    2,000

    3,200

    Indirect labour

    [Direct Labour × Rs 3]

    3,000

    6,000

    Total overhead

    Rs 17,000

    Rs 23,600

    Output

    500

    1,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 34.00

    Rs 23.60

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    2064, Q: 8

    A Company manufactures two products A and B. The following information for the period is provided:

    Particulars

    Product A

    Product B

    Output In units

    1,000

    1,000

    Machine hour per unit

    1.5

    1

    Direct labour hour per unit

    2

    3

    Production run for the period

    3

    2

    The overhead costs are absorbed by product units using rate per direct labour hour and rate of overhead is Rs 16.

    The apportionment of total overheads and their cost drives are as under:

    Cost items

    Cost drives

    % of Apportionment

    Indirect labour

    Direct labour hours

    62.5%

    Scheduling costs

    Production runs

    25%

    Machine related costs

    Machine hours

    12.5%

    Required: (1) Total overhead costs for the period and amount of overhead for each item.

    (2) Total overhead rate for each product by using cost driver rate       

    [Answer: (1) Total overhead = Rs 80,000; and Rs 50,000; Rs 20,000; Rs 10,000;

    (2) Total overhead: A = Rs 38,000; B = Rs 42,000; OPU: A = Rs 38; B= Rs 42]

    SOLUTION

    Given and working note:

    Direct labour hour             = Output × DLHPU

    A

    = 1,000 units × 2 hours

    = 2,000

    B

    = 1,000 units × 3 hours

    = 3,000

     

    Total

    = 5,000

     

     

    Total overhead

    Labour hour rate

    = Total overhead ÷ Total labour hour

    Rs 16

    = Total overhead ÷ 5,000 DLH 

    Total overhead

    = Rs 16 × 5,000 DLH

     

    = Rs 80,000

     

    Again,

    Indirect labour

    = 80,000@62.5%

    = Rs 50,000

    Schedule cost

    = 80,000@25%

    = Rs 20,000

    Machine expenses

    = 80,000@12.5%

    = Rs 10,000

               

     

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver (CD)

    Total CD

    CD Rate

    Indirect labour

    50,000

    Direct labour hour

    5,000

    10

    Schedule cost

    20,000

    Production runs

    5

    4,000

    Machine related cost

    10,000

    Machine hour

    2,500

    4

     

     

    Given and working note for cost driver:

    Direct labour hour

    = Output × DLHPU

     

    A

    = 1,000 units × 2 hours

    = 2,000

    B

    = 1,000 units × 3 hours

    = 3,000

     

    Total

    = 5,000

     

    Machine hour

    = Output × MHPU

     

    A

    = 1,000 × 1.5 hours

    = 1,500

    B

    = 1,000 × 1 hour

    = 1,000

     

    Total

    = 2,500

     

    Production runs

    = A + B

    = 3 + 2

    = 5

     

     

     

    Cost Statement under Activities Based Costing

    Particulars

    A

    B

    Direct materials

     

     

    Direct labour

     

     

    Prime cost

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Indirect labour

    [Direct labour × Rs 10]

    20,000

    30,000

    Schedule costing

    [Production runs × Rs 4,000]

    12,000

    8,000

    Machine expenses

    [Machine hours × Rs 4]

    6,000

    4,000

    Total overhead

    Rs 38,000

    Rs 42,000

    Output

    1,000

    1,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 38

    Rs 42

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    TU: 2067, Q: 8 Or

    A Manufacturing Company produces two products namely A and B. The Information related to products are as follows:

     

    A

    B

    Output in units

    6,000

    4,000

    Labour hour per unit

    4

    2

    Machine hour per unit

    2

    1

    Production runs

    6

    4

     

    Total production overhead recorded and cost driver fixed by the cost department is analysied as:

     

    Cost driver

    Amount (Rs)

    Set up cost

    Production run

    30,000

    Machine department cost (MDC)

    Machine hours

    64,000

    Scheduling cost

    Production run

    40,000

    Required: (a) Cost driver rate by using activity based costing

    (b) Total overhead cost and cost per unit of A and B under activity based costing

    [Answer: (a) Cost driver rate = 3,000; 4; 4,000;

    (b) Total overhead: A = Rs 90,000; B = Rs 44,000;

    Overhead per unit: A = Rs 15; B = Rs 11]

    SOLUTION:

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    1

    2

    3

    4

    5 = 2 ÷ 4

    Set up cost

    30,000

    Production run

    10

    3,000

    Machine department cost (MDC)

    64,000

    Machine hours

    16,000

    4

    Scheduling cost

    40,000

    Production run

    10

    4,000

     

    Working note for total cost driver:

    Machine hours

    = Output × MHPU

     

     

    Production runs

                A

    = 6,000 × 2

    = 12,000

     

    = A + B

                B

    = 4,000 × 1

    =   4,000

     

    = 6 + 4

     

     

    = 16,000

     

    = 10

     

     

     

     

    Cost Statement under Activities Based Costing

    Particulars

    A = 6,000

    B = 4,000

    Direct materials

     

     

    Direct labour

     

     

    Prime cost (given)

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

    Set up cost

    [Production runs × Rs 3,000]

    18,000

    12,000

    MDC

    [Machine hours × Rs 4]

    48,000

    16,000

    Scheduling cost

    [Production runs × Rs 4,000]

    24,000

    16,000

    Total overhead

    Rs 90,000

    Rs 44,000

    Output

    6,000

    4,000

    Overhead per unit  = Total overhead ÷ Output

    Rs 15

    Rs 11

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    TU: 2069, Q: 8 Or

    An Industry, adopting activity based costing, is producing two products. The overhead costs incurred by the industry along with their cost drivers are as follows:

     

    Amount (Rs)

    Cost driver

    Production set up cost

    30,000

    Production run

    Machine department cost (MDC)

    40,000

    Machine hours

    Selling and distribution cost 

    20,000

    Order execution

    Indirect labour cost

    50,000

    DLH

     

    140,000

     

     

    The output and other details of the products are as follows:

    Products

         Output

    DLH

    MH

    Production

    Sales per

    Price cost

     

    Units

    Per unit

    Per unit

    run

    order

    per unit

    X

    20,000

    3

    3/4

    40

    400 units

    8

    Y

    10,000

    4

    1/2

    20

    200 units

    5

    Required: Total cost per unit of each products

    [Answer:

    SOLUTION:

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    1

    2

    3

    4

    5 = 2 ÷ 4

    Production set up cost

    30,000

    Production run

    60

    500

    Machine department cost (MDC)

    40,000

    Machine hours

    20,000

    2

    Selling and distribution cost 

    20,000

    Order execution

    100

    200

    Indirect labour cost

    50,000

    DLH

    100,000

    0.5

     

    Working note for total cost driver:

    Production run 

    Order execution = Output ÷ Order unit

    = X + Y

    X = 20,000 ÷ 400 units

    = 50

    = 40 + 20

    Y = 10,000 ÷ 200 units

    = 50

    = 60

     

    = 100

     

     

     

     

    Machine hours

    = Output × MHPU

     

    DLH

    = Output × DLH per unit

     

                X

    = 20,000 × 3/4

    = 15,000

    X

    = 20,000 × 3

    = 60,000

                Y

    = 10,000 × 1/2

    =   5,000

    Y

    = 10,000 × 4

    = 40,000

     

     

    = 20,000

     

     

    = 100,000

     

     

                     

     

     

    Cost Statement under Activities Based Costing

    Particulars

    X = 20,000

    Y = 10,000

    Direct materials [Output × Price cost per unit]

    160,000

    50,000

    Direct labour {Output × LHPU × Rs]

    Nil

    Nil

    Prime cost

    160,000

    50,000

    Add: Overhead (based on ABC)

     

     

    Production set up cost

    [Production run × Rs 500]

    20,000

    10,000

    MDC

    [Machine hours × Rs 2]

    20,000

    10,000

    S&D cost 

    [Order execution × Rs 200]

    10,000

    10,000

    Indirect labour cost

    [DLH × Re 0.50]

    30,000

    20,000

    Total cost

    Rs 250,000

    Rs 100,000

    Output

    20,000

    20,000

    Cost per unit  = Total overhead ÷ Output

    Rs 12.50

    Rs 10.00

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    2070, Q: 8

    The relevant information of three products made by A Company for a period is given below:

     

    Product X

    Product Y

    Product Z

    Output in units

    2,000

    3,000

    5,000

    Direct labour hours per units

    1.5

    1

    0.8

    Number of order executed

    5

    2

    3

    Number of set ups

    2

    2

    3

     

    The overhead costs and cost drivers are:

     

    Cost driver

    Amount (Rs)

    Production set up cost

    Set ups

    14,000

    Indirect labour

    Direct labour hours

    10,000

    Materials handling and dispatch 

    Order execution

    + 6,000

     

     

    30,000

    Required: Total overhead costs for each product by using: (a) Direct labour hours; (b) Activity based costing

    [Answer:

    SOLUTION:

    Cost Statement under Conventional Method

    Particulars

    X

    Y

    Z

    Direct materials

     

     

     

    Direct labour

     

     

     

    Prime cost

    Nil

    Nil

    Nil

    Add: Overhead (based on LH; LH × LHR)

    9,000

    9,000

    12,000

    Total overhead

    Rs 9,000

    Rs 9,000

    Rs 12,000

    Output

    2,000

    3,000

    5,000

    Cost per unit  = Total overhead ÷ Output

    Rs 4.50

    Rs 3.00

    Rs 2.40

     

    Given and working note:

    Labour hours (LH)

    = Output × LHPU

     

    X

    = 2,000 × 1.5

    = 3,000

    Y

    = 3,000 × 1

    = 3,000

    Z

    = 5,000 × 0.8

    = 4,000

     

    Total

    10,000

     

    Labour hour rate (LHR)   

    Order execution

    = Total overhead ÷ Total labour hours

    = X + Y + Z    

    = Rs 30,000 ÷ 10,000 hours

    = 5 + 2 + 3

    = Rs 3

    = 10

     

     

    Set ups

     

    = X + Y + Z    

     

    = 2 + 2 + 3

     

    = 7

     

     

           

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver (CD)

    Total CD

    CD Rate

    Production set up cost

    14,000

    Set ups

    7

    2,000

    Indirect labour

    10,000

    Direct labour hours

    10,000

    1

    Materials handling and dispatch  (MHD)

    6,000

    Order execution

    10

    600

     

     

    Cost Statement under Activities Based Costing

    Particulars

    X

    Y

    Z

    Direct materials

     

     

     

    Direct labour

     

     

     

    Prime cost

    Nil

    Nil

    Nil

    Add: Overhead (based on ABC)

     

     

     

    Production set up cost

    [Set ups × Rs 2,000]

    4,000

    4,000

    6,000

    Indirect labour

    [Direct labour hour × Re 1]

    3,000

    3,000

    4,000

    MHD 

    [Orders executed × Rs 600]

    3,000

    1,200

    1,800

    Total overhead

    Rs 10,000

    Rs 8,200

    Rs 11,800

    Output

    2,000

    3,000

    5,000

    Cost per unit  = Total overhead ÷ Output

    Rs 5

    Rs 2.56

    Rs 2.36

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    TU: 2071, Q: 8 Or

    An Industry, adopting activity based costing, is producing two products.

    Detailed information are as follows:

    Products

    Output

    Raw materials

    Labour hour

    Labour

    MH

    No. of product

    No. of

    No. of

     

    In units

    Per unit

    Per unit

    Hour rate

    Per unit

    Delivered

    Set ups

    Receipts

    P1

    30,000

    Rs 8

    0.5

    Rs 10

    3

    8

    20

    30

    P2

    20,000

    Rs 6

    0.5

    Rs 10

    2

    5

    15

    20

    Overhead cost

    Set up cost

    Rs 7,000

    Machine related cost

    Rs 65,000

    Receiving cost

    Rs 20,000

    Packing cost

    + Rs 26,000

    Total

    Rs 118,000

    Required: Product cost per unit by using activity based costing method

    [Answer: (a) Cost driver rate = 200; 0.5; 400; 2,000;

    (b) Total overhead: P1 = Rs 467,000; P2 = Rs 261,000;

    Overhead per unit: P1 = Rs 15.57; P2 = Rs 13.35]

    SOLUTION:

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    1

    2

    3

    4

    5 = 2 ÷ 4

    Set up cost

    7,000

    No. of set ups

    35

    200

    Machine related cost

    65,000

    Machine hours

    130,000

    0.5

    Receiving cost

    20,000

    No. of receipt

    50

    400

    Packing cost

    26,000

    No. of delivered

    13

    2,000

     

    Working note for total cost driver:

    Set ups

    No. of receipts 

    No. of product delivered

    = P1 + P2

    = P1 + P2

    = P1 + P2

    = 20 + 15

    = 30 + 20

    = 8 + 5

    = 35

    = 50

    = 13

     

    Machine hours

    = Output × MHPU

     

                P1

    = 30,000 × 3

    = 90,000

                P2

    = 20,000 × 2

    = 40,000

     

     

    = 130,000

     

             

     

     

    Cost Statement under Activities Based Costing

    Particulars

    P1 = 30,000

    P2 = 20,000

    Direct materials [Output × RMPU]

    240,000