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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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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