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Home /  Activity Based Costing
  • 457 Views
  • Estimated reading time : 490 Minutes
  • Activity Based Costing | TU Solution | Traditional Costing | LAQ

  • Arjun EP
  • Published on: April 1, 2022

  •  

     

    Activity Based Costing | TU Solution | 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, Q: 16

    A Manufacturing Company manufactures three products A, B and C. The details regarding product and cost are summarized in the following table:

    Products

    Output units

    Direct labour

    Machine

    Materials cost

    Production run

     

     

    Hour/unit

    Hour/unit

    Per unit

    Per product

    A

    2,000

    2.5

    2

    Rs 10

    10

    B

    5,000

    4.0

    2

    Rs 12

    15

    C

    10,000

    5.0

    2

    Rs 15

    20

     

    Further information:

    (i) Direct labour cost per hour is Rs 4

    (ii) Overhead cost and cost driver:

     

    Amount

    Cost driver

                Repair and maintenance

    Rs 102,000

    Machine hours

                Set up cost

    Rs 90,000

    Production runs

                Scheduling cost

    Rs 45,000

    Production runs

                Indirect labour

    Rs 138,000

    DLH

                Total

    Rs 375,000

     

    Required: (a) Cost per unit under traditional costing system by using direct labour

    (b) Cost absorption statement under ABC system

    (a) Total cost: A = Rs 65,000; B = Rs 240,000; C = Rs 600,000;

    CPU: A = Rs 32.50; B = Rs 48; C = Rs 60;

    (b) Total cost: A = Rs 91,000; B = Rs 251,000; C = Rs 562,000;

    CPU: A = Rs 45.60; B = Rs 50.36; C = Rs 56.20;

    *CDR = Rs 3; Rs 2,000; Rs 1,000; Rs 1.84]

    SOLUTION

    Given and working note: 

    Direct labour hour             = Output × DLHPU

    Direct labour hour rate   

    A

    = 2,000 units × 2.5 hours

    = 5,000 hours

    = Total overhead  ÷ Direct labour hour  

    B

    = 5,000 units × 4 hours

    = 20,000 hours

    = Rs 375,000 ÷ 75,000 hours    

    C

    = 10,000 units × 5 hours

    = 50,000 hours

    = Rs 5

    Total    

    = 75,000 hours

     

     

     

    Statement of Cost under Traditional Costing System

    Particulars

    Products

     

    A = 2,000

    B = 5,000

    C = 10,000

    Materials      [Output × MCPU]

    20,000

    60,000

    150,000

    Labour           [Output × DLHPU × Rs 4]

    20,000

    80,000

    200,000

    Prime cost

    40,000

    140,000

    350,000

    Add: Overhead based on LH (DLH × LH Rate)

    25,000

    100,000

    250,000

    Total cost

    Rs 65,000

    Rs 240,000

    Rs 600,000

    Output

    2,000

    5,000

    10,000

    Cost per unit  (CPU) = Total cost ÷ Output

    Rs 32.50

    Rs 48.00

    Rs 60.00

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Repair and maintenance

    102,000

    Machine hours

    34,000

    3

    Set up cost

    90,000

    Production runs

    45

    2,000

    Scheduling cost

    45,000

    Production runs

    45

    1,000

    Indirect labour

    138,000

    DLH

    75,000

    1.84

     

    Given and working note for cost driver:

    Production runs

    Machine hours = Output × MHPU

    A

     

    = 10

    A

    = 2,000 units × 2 h

    =   4,000

    B

     

    = 15

    B

    = 5,000 units × 2 h

    = 10,000 

    C

     

    = 20

    C

    = 10,000 units × 2 h

    = 20,000 

    Total

    = 45

    Total

    =  34,000

     

     

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    A = 2,000

    B = 5,000

    C = 10,000

    Materials      [Output × MCPU]

    20,000

    60,000

    150,000

    Labour          [Output × DLHPU × Rs 4]

    20,000

    80,000

    200,000

    Prime cost

    40,000

    140,000

    350,000

    Add: Overheads: (based on ABC)

     

     

     

    Repair and maintenance

    [Machine hours × Rs 3]

    12,000

    30,000

    60,000

    Set up cost

    [Production runs × Rs 2,000]

    20,000

    30,000

    40,000

    Scheduling cost

    [Production runs × Rs 1,000]

    10,000

    15,000

    20,000

    Indirect labour

    [DLH × Rs 1.84]

    9,200

    36,800

    92,0020

    Total cost

    Rs 91,000

    Rs 251,000

    Rs 562,000

    Output

    2,000

    5,000

    10,000

    Cost per unit  (CPU) = Total cost ÷ Output 

    Rs 45.60

    Rs 50.36

    Rs 56.20

     

     

    ######

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    ######

     

     

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

    2057, Q: 16

    A Manufacturing Company manufactures three products X, Y and Z by using the same plant and process. The following information related to a particulars period:

    Products

    Output units

    Materials

    Direct labour

    Machine hour

    Production run

     

     

    cost per unit

    cost per unit

    per unit

    Per product

    X

    100

    Rs 100

    Rs 6

    2 hours

    4

    Y

    200

    Rs 50

    Rs 3

    1 hour

    8

    Z

    500

    Rs 40

    Rs 5

    1.2 hours

    20

     

    The production overhead cost and cost driver:

    Overheads

    Amount (Rs)

    Cost driver

    Set up cost

    64,000

    No. of production runs

    Store receiving

    8,000

    Requisition raised

    Inspection and control

    16,000

    No. of production runs

    Material handling and dispatch

    16,000

    Order executed

                Total

    Rs 104,000

     

    Additional information:

    (i) Three products were produced in a production run of 25 units each

    (ii) The requisition raised for the period in the stores for product X, Y and Z were 10, 10 and 20 respectively

    (iii) The number of order being in a batch of 20 units for each product and number of total order executed was 40

    Required: Statement of total cost and cost per unit for each product by using:

    (a) Conventional absorption costing on the basis machine hours; (b) An activity based costing by using suitable cost drivers

    [Answer: (a) Total cost: X = Rs 31,400; Y = Rs 31,400; Z = Rs 84,900;

    CPU: X = Rs 314; Y = Rs 157; Z = Rs 169.80;

    (b) Total cost: X = Rs 24,600; Y = Rs 36,600; Z = Rs 86,500;

    CPU: X = Rs 246; Y = Rs 183; Z = Rs 173;

    *CDR = Rs 2,000; Rs 200; Rs 500; Rs 400]

    SOLUTION

    Given and working note: 

    Machine hours = Output × MHPU

    Machine hour rate (MHR)          

    X

    = 100 units × 2 hours

    = 200 hours

    = Total overhead ÷ Machine hours     

    Y

    = 200 units × 1 hour

    = 200 hours

    = Rs 104,000 ÷ 1,000 hours      

    Z

    = 500 units × 1.2 hours

    = 600 hours

    = Rs 104

    Total    

    = 1,000 hours

     

     

     

    Statement of Cost under Traditional Costing System

    Particulars

    Products

     

    X = 100

    Y = 200

    Z = 500

    Materials      [Output × MCPU]

    10,000

    10,000

    20,000

    Labour           [Output × DLHPU]

    600

    600

    2,500

    Prime cost

    10,600

    10,600

    22,500

    Add: Overhead based on MH (MH × MHR)

    20,800

    20,800

    62,400

    Total cost

    Rs 31,400

    Rs 31,400

    Rs 84,900

    Output

    100

    200

    500

    Cost per unit  (CPU) = Total cost ÷ Output

    Rs 314.00

    Rs 157.00

    Rs 169.80

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Set up cost

    64,000

    No. of production runs

    32

    2,000

    Store receiving

    8,000

    Requisition raised

    40

    200

    Inspection and control

    16,000

    No. of production runs

    32

    500

    Material handling and dispatch

    16,000

    Order executed

    40

    400

     

    Given and working note for cost driver:

    Production runs

    Requisition raised

    No. of order executed = Output ÷ 20

    = X + Y + Z

    = X + Y + Z

    X = 100 ÷ 20

    = 5

    = 4 + 8 + 20

    = 10 + 10 + 20

    Y = 200 ÷ 20

    = 10

    = 32

    = 40

    Z = 500 ÷ 20

    = 25

     

     

    Total

    = 40

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    X = 100

    Y = 200

    Z = 500

    Materials      [Output × MCPU]

    10,000

    10,000

    20,000

    Labour          [Output × MHPU]

    600

    600

    2,500

    Prime cost

    10,600

    10,600

    22,500

    Add: Overheads: (based on ABC)

     

     

     

    Set up cost

    [Production runs × Rs 2,000]

    8,000

    16,000

    40,000

    Store receiving

    [Requisition raised × Rs 200]

    2,000

    2,000

    4,000

    Inspection and control

    [Production runs × Rs 500]

    2,000

    4,000

    10,000

    Material H&D

    [Order executed × Rs 400]

    2,000

    4,000

    10,000

    Total cost

    Rs 24,600

    Rs 36,600

    Rs 86,500

    Output

    100

    200

    500

    Cost per unit  (CPU) = Total cost ÷ Output 

    Rs 246

    Rs 183

    Rs 173

     

     

     

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

    2060/First, Q: 16

    Three products A, B and C are produced by A Manufacturing Concern. The details of the particular are noted in the table:

    Materials

    Output units

    DLH

    Machine hours

    Raw materials cost

    Raw materials usage

     

     

    per unit

    per unit

    per kg  (Rs)

    per unit

    A

    5,000

    1.0

    4/5

    2

    1.5

    B

    7,000

    2.0

    1.5

    3

    2.0

    C

    8,000

    2.5

    2.0

    5

    2.5

    Other details are:

    (i) Direct labour cost per hour is Rs 6

    (ii) 1,000 units batch of production run is effective in each product.

    (iii) Raw materials purchase consists of 500 kg in each purchase.

     

    Actual overhead incurred are:

    Overhead

    Amount  (Rs )

    Cost tools

     

    Production scheduling cost

    30,000

    Production run

     

    Maintenance expenses

    15,250

    Machine hours

     

    Indirect labour

    62,400

    DLH

     

    Set up costs

    28,430

    Production run

     

    Order execution cost

    19,920

    Order executed

     

     

    156,000

     

     

    Required: (1) Traditional cost statement by using DLH for overhead to determine total cost and cost per unit

    (2) ABC Statement showing total cost and cost per unit for each product, allocating cost by using cost drives

     [Answer: (1) TC = Rs 65,000; Rs 182,000; Rs 300,000; CPU = Rs 13; Rs 26; Rs 37.50;

    (2) TC = Rs 74,588; Rs 181,073; Rs 291,340; CPU = Rs 14.92; Rs 25.87; Rs 36.42;

    *CDR = 1,500; 0.50; 1.60; 1,421.50; 498; other executed = Output ÷ 500 kg]

    *Materials usage is applied for direct materials only]

    SOLUTION

    Given and working note: 

    Direct labour hour             = Output × DLHPU

    Direct labour hour rate   

    A

    = 5,000 units × 1 hours

    = 5,000 hours

    = Total overhead (given) ÷ Direct labour hour            

    B

    = 7,000 units × 2 hours

    = 14,000 hours

    = Rs 156,000 ÷ 39,000 hours    

    C

    = 8,000 units × 2.5 hours

    = 20,000 hours

    = Rs 4

    Total    

    = 39,000 hours

     

     

     

    Statement of Cost under Traditional Costing System

    Particulars

    Products

     

    A = 5,000

    B = 7,000

    C = 8,000

    Materials      [Output × Usage @ MCPU]

    15,000

    42,000

    100,000

    Labour           [Output × DLHPU @ Rs 6]

    30,000

    84,000

    120,000

    Prime cost

    45,000

    126,000

    220,000

    Add: Overhead based on LH (DLH × LH Rate)

    20,000

    56,000

    80,000

    Total cost

    Rs 65,000

    Rs 182,000

    Rs 300,000

    Output

    5,000

    7,000

    8,000

    Cost per unit  (CPU) = Total cost ÷ Output

    Rs 13.00

    Rs 26.00

    Rs 37.50

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Production schedule cost

    30,000

    Production runs

    20

    1,500.00

    Maintenance expenses

    15,250

    Machine hour

    30,500

    0.50

    Indirect labour

    62,400

    Direct labour hour

    39,000*

    1.60

    Set up

    28,430

    Production runs

    20

    1,421.50

    Other execution

    19,920

    Other execution

    40

    498.00

     

    Given and working note for cost driver:

    Production runs = Output ÷ 1,000 units

    Machine hours = Output × MHPU

    A

    = 5,000 units ÷ 1,000 units

    = 5

    A

    = 5,000 units × 4/5 h

    =   4,000

    B

    = 7,000 units ÷ 1,000 units

    = 7

    B

    = 7,000 units × 1.5 h

    = 10,500 

    C

    = 8,000 units ÷ 1,000 units

    = 8

    C

    = 8,000 units × 2 h

    = 16,000 

    Tota

    = 20

    Total

       30,500

     

     

    Other execution = Output ÷ 500 kg

     

    A

    = 5,000 ÷ 500

    = 10

     

    B

    = 7,000 ÷ 500

    = 14

     

    C

    = 8,000 ÷ 500

    = 16

     

    Total

    = 40

     

                   

     

     

    Statement of Cost under Activity Based Costing (ABC)

    Particulars

    Products

     

    A = 5,000

    B = 7,000

    C = 8,000

    Materials      [Output × Usage × MCPU]

    15,000

    42,000

    100,000

    Labour          [Output × DLHPU × Rs 6]

    30,000

    84,000

    120,000

    Prime cost

    45,000

    126,000

    220,000

    Add: Overheads: (based on ABC)

     

     

     

    Production schedule cost

    [Production runs × Rs 1,500]

    7,500

    10,500

    12,000

    Maintenance expenses

    [Machine hour × Re 0.50]

    2,000

    5,250

    8,000

    Indirect labour

    [Direct labour hour × Rs 1.60]

    8,000

    22,400

    32,000

    Set up

    [Production runs × Rs 1,421.5]

    7,108

    9,951

    11,372

    Order  execution

    [Order execution × Rs 498]

    4,980

    6,972

    7,968

    Total cost

    74,588

    181,073

    291,340

    Output

    5,000

    7,000

    8,000

    Cost per unit  (CPU) = Total cost ÷ Output 

    14.92

    25.87

    36.42

     

     

     

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

    2065, Q: 16

    AE Manufacturing Company produces three products namely P, Q and R using the same plant and similar production process. The detail information of the products and cost are summarized below:

    Production

    Output

    in units

    DLH

    per unit

    MH

    per unit

    Direct materials

    cost per unit

    Direct labour

    cost per unit

    Production

    runs per product

                  P             

    2,500

    3

    1.5

    Rs 15

    Rs 6

    15

    Q

    3,000

    4

    1.5

    Rs 18

    Rs 8

    8

    R

    4,000

    4.5

    2.0

    Rs 20

    Rs 9

    12

     

    Other information regarding overhead cost and suitable cost driver are given below:

    Cost pool

    Amount

    Cost driver

    Schedule cost

    35,000

    Production run

    Set up cost

    37,500

    Production run

    Indirect labour cost

    75,000

    Direct labour hours

    Repair and maintenance

    40,000

    Machine hours

    Required: (1) Total cost and cost per unit under traditional costing system using labour hour

    (2) Total cost and cost per unit under ABC using suitable cost driver

    (3) Comparative statement of unit cost under two methods

    [Answer: (1) TC = Rs 90,000; Rs 138,000; Rs 206,000;

    CPU = Rs 36; Rs 46; Rs 51.50;

    (2) TC = Rs 107,796; Rs 129,641; Rs 196,537;

    CPU = Rs 43.12; Rs 43.21; Rs 49.13;

    (3) Difference: P = -7.12; Q: = +2.79; R = + 2.37;

    *CDR = Rs 1,000; Rs 1,071.43; Rs 2; Rs 2.46

    CPU = Rs 79; Rs 74; Rs 70]

    SOLUTION

    Given and working note:

    Total labour hours

    = Output × LHPU

     

    Labour hour rate  

    P

    = 2,500 × 3

    =   7,500

    = Total cost ÷ Total labour hour

    Q

    = 3,000 × 4

    = 12,000

    = 187500 ÷ 37,500

    R

    = 4,000 × 4.5

    = 18,000

    = Rs 5 per hour

     

    Total

    = 37,500

     

               

     

    Cost Statement under Traditional Costing

    Particulars

    P

    Q.

    R

    Direct materials        [Output × MCPU]

    37,500

    54,000

    80,000

    Direct labour             [Output × LHPU]

    15,000

    24,000

    36,000

    Prime cost

    52,500

    78,000

    116,000

    Add: Overhead (based on labour hours)

    37,500

    60,000

    90,000

    Total cost

    Rs 90,000

    Rs 138,000

    Rs 206,000

    Output

    2,500

    3,000

    4,000

    Cost per unit  = Total cost ÷ Output

    Rs 36

    Rs 46

    Rs 51.5

     

     

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost driver

    Total cost driver

    CDR

    Schedule Costing

    35,000

    Production Runs

    35

    1,000.00

    Set Up Cost

    37,500

    Production Runs

    35

    1,071.43

    Indirect Labour

    75,000

    Direct Labour

    37,500

    2.00

    Repairs and Maintenance 

    40,000

    Machine Hours

    16,250

    2.46

     

    Given and working note for cost driver:

    Production runs

     

    Machine hours

    = Output × MHPU

     

    = P + Q + R

     

    P

    = 2,500 × 1.5

    = 3,750

    = 15 + 8 + 12

     

    Q

    = 3,000 × 1.5

    = 4,500

    = 35

     

    R

    = 4,000 × 2

    = 8,000

     

     

     

    Total

    = 16,250

     

    Cost Statement under Activities Based Costing

     

    P

    Q

    R

    Direct materials        [Output × MCPU]

    37,500

    54,000

    80,000

    Direct labour             [Output × LHPU]

    15,000

    24,000

    36,000

    Prime cost

    52,500

    78,000

    116,000

    Add: Overhead (based on ABC)

     

     

     

    Schedule costing

    [Production runs    × Rs 1,000]

    15,000

    8,000

    12,000

    Set up cost

    [Production runs    × Rs 1,071.43]

    16,071

    8,571

    12,857

    Indirect labour

    [Direct labour          × Rs 2]

    15,000

    24,000

    36,000

    Repairs and maintenance

    [Machine hours      × Rs 2.46]

    9,225

    11,070

    19,680

    Total cost

    Rs 107,796

    Rs 129,641

    Rs 196,537

    Output

    2,500

    3,000

    4,000

    Cost per unit  = Total cost ÷ Output

    Rs 43.12

    Rs 43.21

    Rs 49,13

     

     

    Comparatives of cost per unit

     

    P

    Q

    R

    Traditional costing

    Rs 36.00

    Rs 46.00

    51.50

    Activity based costing

    Rs 43.12

    Rs 43.21

    49.13

    Difference

    (Rs  7.12)

    Rs 2.79

    Rs 2.37

     

     

     

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

    2066, Q: 16

    A Manufacturing Company manufactures three products namely M, N and O. The details regarding products and their overhead cost and related cost driver for a period are as follows:

    Cost pool

    Cost (Rs )

    Cost driver

    Repair cost

    16,000

    Machine hours

    Schedule cost

    30,000

    Production runs

    Materials handling

    32,000

    Quantity of materials

    Set up cost

    30,000

    No. of set up

     

    Data for the period are:

    Production

         Output

    LH

    MH

    No. of set up

    Materials cost

    Materials

    Production

     

     

    Per unit

    Per unit

     

     per unit

    per unit

    runs

    M

    2,000

    3

    3

    3

    200

    2

    3

    N

    4,000

    2

    5

    6

    150

    2

    4

    O

    2,000

    2

    3

    3

    150

    2

    3

    Further information:

    ·          Direct labour cost per hour Rs 4

    Required: statement of total cost and cost per unit for each product by using:

    (1) Conventional absorption costing on the basis of labour hour

    (2) An activity based costing using suitable cost drivers

    [Answer: (1) TC: M = Rs 460,000; N = Rs 680,000; O = Rs 340,000;

    CPU: M = Rs 230; N = Rs 170; O = Rs 170;

    (2) TC: M = Rs 451,500; N = Rs 685,000; O = Rs 343,500;

    CPU: M = Rs 225.75; N = Rs 171.25; O = Rs 171.75;

    * Qty of materials = Output x MPU]

    SOLUTION

    Given and working note: 

    Labour hours

    = Output × LHPU

     

    Labour hours rate                        

    M

    = 2,000 × 3

    = 6,000

    = Total overhead ÷ Total labour hours

    N

    = 4,000 × 2

    = 8,000

    = Rs 108,000 ÷ 18,000 hours

    O

    = 2,000 × 2

    = 4,000

    = Rs 6

     

    Total

    = 18,000

     

     

     

    Cost Statement under Conventional Costing

    Particulars

    Products

     

    M = 2,000

    N = 4,000

    O = 2,000

    Direct materials      [Output × RCPU]

    400,000

    600,000

    300,000

    Direct labour           [Output × LHPU × Rs 4]

    24,000

    32,000

    16,000

    Prime cost

    424,000

    632,000

    316,000

    Add: Overhead (based on labour hours):

     

     

     

    Labour expenses (LH × LHR)

    36,000

    48,000

    24,000

    Total cost

    Rs 460,000

    Rs 680,000

    Rs 340,000

    Output

    2,000

    4,000

    2,000

    Cost per unit s         = Total cost ÷ Output

    Rs 230

    Rs 170

    Rs 170

     

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    1

    2

    3

    4

    5 = 2 ÷ 4

    Repair cost

    16,000

    Machine hours

    32,000

    0.50

    Schedule cost

    30,000

    Production runs

    10

    3,000.00

    Materials handling

    32,000

    Quantity of materials

    16,000

    2.00

    Set up cost

    30,000

    No. of set up

    12

    2,500.00

     

    Working note for total cost driver:

    Machine hours

    = Output × MHPU

     

    Production runs

                M

    = 2,000 × 3

    =   6,000

    = M + N + O

                N

    = 4,000 × 5

    = 20,000

    = 3 + 4 + 3

                O

    = 2,000 × 3

    =  6,000

    = 10

     

     

    = 32,000

     

     

     

     

     

    Quantity of materials

    = Output × MPU

     

    No. of set up

                M

    = 2,000 × 2

    = 4,000

    = M + N + O

                N

    = 4,000 × 2

    = 8,000

    = 3 + 6 + 3

                O

    = 2,000 × 2

    = 4,000

    = 12

     

     

    = 16,000

     

     

     

    Cost Statement under ABC

    Particulars

    Products

     

    M

    N

    O

    Direct materials      [Output × RCPU]

    400,000

    600,000

    300,000

    Direct labour           [Output × LHPU × Rs 4]

    24,000

    32,000

    16,000

    Prime cost

    424,000

    632,000

    316,000

    Add: Overhead (based on ABC):

     

     

     

    Repair cost

    [Machine hours × Re 0.50]

    3,000

    10,000

    3,000

    Schedule cost

    [Production runs × Rs 3,000]

    9,000

    12,000

    9,000

    Materials handling

    [Qty of materials × Rs 2]

    8,000

    16,000

    8,000

    Set up cost

    [No. of set up × Rs 2,500]

    7,500

    15,000

    7,500

    Total cost

    Rs 451,500

    Rs 685,000

    Rs 343,500

    Output

    2,000

    4,000

    2,000

    Cost per unit s         = Total cost ÷ Output

    Rs 225.75

    Rs 171.25

    Rs 171.75

     

     

     

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

    2068, Q: 16 Or

    A Manufacturing Company provides following information regarding the products and cost relating to their production:

     

    A

    B

    C

    Unit produced

    18,000

    14,000

    10.000

    Production runs

    9

    7

    5

    Machine hours per unit

    5

    4

    3

    Sales order received

    18

    14

    10

    DLHs used per unit

    7.5

    6

    4.5

    Raw materials per unit

    Rs 55

    Rs 60

    Rs 48

    Variable overhead per unit

    Rs 21.5

    Rs 23

    Rs 11.75

     

    The total production overheads for the period with cost are given below:

    Cost pools

    Overhead cost to cost pool (Rs)

    Materials handling and dispatches cost

    35,700

    Machine handling cost

    110,000

    Store receiving cost

    27,000

    Inspection cost

    22,050

    Machine set ups cost

    27,510

     

    222,260

    Other information:

    The DLH rate is Rs 2.50 per hour.

    The numbers of requisition raised on the store were 25 for each product.      

    The production overhead is presently is presently apportioned on the basis of machine hours.

    Required: (a) Unit cost under traditional volume based costing system and unit selling price at 20% profit on cost.

    (b) Unit cost under ABC system showing cost driver rate with cost product of each cost pool and unit selling price at 120% of cost.

     [Answer: (1a) TC: A = Rs 18,28,156; B = Rs 14,42,719; C = Rs 7,47,885;

    CPU: A = Rs 101.56; B = Rs 103.05; C = Rs 74.79;

    Profit: A = Rs 20.31; B = Rs 20.61; C = Rs 14.96;

    (b) TC: A = Rs 18,16,290; B = Rs 14,44,420; C = Rs 7,58,050;

    CPU: A = Rs 100.91; B = Rs 103.17; C = Rs 75.81;

    Profit: A = Rs 20.18; B = Rs 20.63; C = Rs 15.16]

    *Requisition raised A = 25; B = 25; C =25

    SOLUTION

    Given and working note: 

    Machine hours

    = Output × MHPU

     

    Labour hours rate                        

    A

    = 18,000 × 5

    = 90,000

    = Total overhead ÷ Total labour hours

    B

    = 14,000 × 4

    = 56,000

    = Rs 222,260 ÷ 176,000 hours

    C

    = 10,000 × 3

    = 30,000

    = Rs 1.26284

     

    Total

    = 176,000

     

     

     

    Cost Statement under Conventional Costing

    Particulars

    Products

     

    A = 18,000

    B = 14,000

    C = 10,000

    Direct materials      [Output × RCPU]

    9,90,000

    8,40,000

    4,80,000

    Direct labour           [Output × LHPU × Rs 2.5]

    3,37,500

    2,10,000

    1,12,500

    Prime cost

    13,27,500

    10,50,000

    5,92,500

    Add: Overhead (based on machine hours):

     

     

     

    Machine expenses (MH × MHR)

    1,13,656

    70,719

    37,885

    Variable production overhead [Output × VOPU]

    3,87,000

    3,22,000

    1,17,500

    Total cost

    Rs 18,28,156

    Rs 14,42,719

    7,47,885

    Output

    18,000

    14,000

    10,000

    Cost per unit s = Total cost ÷ Output

    Rs 101.56

    Rs 103.05

    Rs 74.79

    Add: Profit

    20.31

    20.61

    14.96

    Selling price per unit

    Rs 121.87

    Rs 123.66

    Rs 89.75

     

     

    Calculation of Cost Driver Rate

    Activities

    Amount

    Cost Driver (CD)

    Total CD

    CD Rate

    1

    2

    3

    4

    5 = 2 ÷ 4

    Materials handling and dispatches cost

    35,700

    Sales order received

    42

    850

    Machine handling cost

    110,000

    Machine hours

    176,000

    0.625

    Store receiving cost

    27,000

    Requisition raised

    75

    360

    Inspection cost

    22,050

    Production run

    21

    1,050

    Machine set ups cost

    27,510

    Production run

    21

    1,310

     

    Working note for total cost driver:

    Sales order received

    Requisition raised 

    Production run

    = A + B + C

    = A + B + C

    = A + B + C

    = 18 + 14 + 10

    = 25 + 25 + 25

    = 9 + 7 + 5

    = 42

    = 75

    = 21

     

     

    Cost Statement under ABC

    Particulars

    Products

     

    A = 18,000

    B = 14,000

    C = 10,000

    Direct materials      [Output × RCPU]

    9,90,000

    8,40,000

    4,80,000

    Direct labour           [Output × LHPU × Rs 2.5]

    3,37,500

    2,10,000

    1,12,500

    Prime cost

    13,27,500

    10,50,000

    5,92,500

    Add: Variable production overhead [Output × VOPU]

    3,87,000

    3,22,000

    1,17,500

    Add: Overhead (based on ABC):

     

     

     

    Materials H&D

    [Sales order received × Rs 850]

    15,300

    11,900

    8,500

    Machine handling cost

    [Machine hours × Re 0.625]

    56,250

    35,000

    18,750

    Store receiving cost

    [Requisition raised × Rs 360]

    9,000

    9,000

    9,000

    Inspection cost

    [Production run × Rs 1,050]

    9,450

    7,350

    5,250

    Machine set ups cost

    [Production run × Rs 1,310]

    11,790

    9,170

    6,550

    Total cost

    Rs 18,16,290

    Rs 14,44,420

    Rs 7,58,050

    Output

    18,000

    14,000

    10,000

    Cost per unit s = Total cost ÷ Output

    Rs 100.91

    Rs 103.17

    Rs 75.81

    Add: Profit

    20.18

    20.63

    15.16

    Selling price per unit

    Rs 121.09

    Rs 123.80

    Rs 90.97

     

     

     

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

    2072, Q: 16

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

    Products

    Units

    Machine hour

    Production runs

    Prime cost

    Materials component

    A

    3,000

    9,000

    10

    Rs 10,000

    6,000

    B

    2,000

    4,000

    5

    Rs 8,000

    8,000

    The overhead cost and cost drivers are as follows:

    Cost

    Cost drivers

    Amount

    Machine related activities

    Machine hours 

    39,000

    Set up cost

    Production runs 

    30,000

    Material handing cost

    No. of material components 

    28,000

     

     

    97,000

    Required: Unit production cost: (a) Using conventional costing system; (b) Using ABC system;

    (c) Comment on the results of two methods                  

    [Answer: (a) TC: A = Rs 77,154; B = Rs 37,546; CPU: A = Rs 25.72; B = Rs 18.92;

    (b) TC: A = Rs 69,000; B = Rs 46,000; CPU: A = Rs 23; B = Rs 23;

    *CDR = 3; 2,000; 2;

    SOLUTION:

    Given and working note: 

    Machine hours

    Machine hours rate                     

    Production runs

    Materials component

    = A + B

    = Total overhead ÷ Total machine hours

    = A + B

    = A + B

    = 9,000 + 4,000

    = Rs 97,000 ÷ 13,000 hours

    = 10 + 5

    = 6,000 + 8,000

    = 13,000

    = Rs 7.4615

    = 15

    = 14,000

     

     

     

     

     

     

    Cost Statement under Traditional Costing

    Particulars

    A = 3,000

    B = 2,000

    Materials           

    ××××

    ××××

    Labour               

    ××××

    ××××

    Prime cost (given)

    10,000

    8,000

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

    67,154

    29,846

    Total cost

    Rs 77,154

    Rs 37,846

    Output

    3,000

    2,000

    Cost per unit = Total overhead ÷ Output

    Rs 25.72

    Rs 18.92

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Machine related activities

    39,000

    Machine hours 

    13,000

    3

    Set up cost

    30,000

    Production runs 

    15

    2,000

    Material handing 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 cost

    [Production runs × Rs 2,000]

    20,000

    10,000

    Material handing cost

    [No. of material components  × Rs 2]

    12,000

    16,000

    Total cost  

    Rs 69,000

    Rs 46,000

    Output

    3,000

    2,000

    Cost per unit  = Total overhead ÷ Output

    Rs 23

    Rs 23

     

     


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

    2075, Q: 17

    A Manufacturing Company provided the following particulars for the period ended:

    Items

    Cost drivers

    Products

    Overhead (Rs)

     

     

    P

    Q

    R

     

    Production runs

    –

    5,000

    4,000

    3,000

    –

    Material purchasing cost

    Order executed

    7

    8

    3

    36,000

    Set up cost

    Production runs

    10

    9

    6

    50,000

    Maintenance cost

    Machine hours

    7,000

    4,000

    2,000

    26,000

    Materials handing cost

    Quantity of materials

    4,000

    3,000

    2,000

    18,000

    Direct materials cost per unit (Rs)

    –

    4

    5

    6

    –

    Direct labour cost per unit (Rs)

    –

    6

    5

    4

    –

    Required: Unit production cost: (a) Traditional costing system based on machine hours; (b) ABC system

    [Answer: (a) TC: P = Rs 120,000; Q = Rs 80,000; R = Rs 50,000;

    CPU: P = Rs 24; Q = Rs 20; R = Rs 16.67;

    (b) TC: P = Rs 106,000; Q = Rs 88,000; R = Rs 56,000;

    CPU: P = Rs 21.20; Q = Rs 22; R = Rs 18.57;

    *CDR = 2,000; 2,000; 2; 2;

    SOLUTION

    Given and working note: 

    Total overhead

    Order executed

    = 36,000 + 50,000 + 26,000 + 18,000

    = P + Q + R

    = 130,000

    = 7 + 8 + 3

     

    = 18

    Machine hours

     

    = P + Q + R

    Production runs

    = 7,000 + 4,000 + 2,000

    = P + Q + R

    = 13,000

    = 10 + 9 + 6

     

    = 25

    Machine hours rate                     

     

    = Total overhead ÷ Total labour hours

    Quantity of materials

    = Rs 130,000 ÷ 13,000 hours

    = P + Q + R

    = Rs 10

    = 4,000 + 3,000 + 2,000

     

    = 9,000

     

     

    Cost Statement under Conventional Costing

    Particulars

    Products

     

    P = 5,000

    Q = 4,000

    R = 3,000

    Direct materials      [Output × RCPU]

    20,000

    20,000

    18,000

    Direct labour           [Output × LHPU]

    30,000

    20,000

    12,000

    Prime cost

    50,000

    40,000

    30,000

    Add: Overhead (based on machine hours):

     

     

     

    Machine expenses (MH × MHR)

    70,000

    40,000

    20,000

    Total cost

    Rs 120,000

    Rs 80,000

    Rs 50,000

    Output

    5,000

    4,000

    3,000

    Cost per unit s = Total cost ÷ Output

    Rs 24

    Rs 20

    Rs 16.67

     

    Calculation of Cost Driver Rate

    Activities                                

    Cost

    Cost Driver

    Total CD

    CDR

    Material purchasing cost

    36,000

    Order executed

    18

    2,000

    Set up cost

    50,000

    Production runs

    25

    2,000

    Maintenance cost

    26,000

    Machine hours

    13,000

    2

    Materials handing cost

    18,000

    Quantity of materials

    9,000

    2

     

     

     

    Cost Statement under ABC

    Particulars

    Products

     

    P = 5,000

    Q = 4,000

    R = 3,000

    Direct materials      [Output × RCPU]

    20,000

    20,000

    18,000

    Direct labour           [Output × LHPU]

    30,000

    20,000

    12,000

    Prime cost

    50,000

    40,000

    30,000

    Add: Overhead (based on ABC):

     

     

     

    Material purchasing cost

    [Order executed × Rs 2,000]

    14,000

    16,000

    6,000

    Set up cost

    [Production runs × Rs 2,000]

    20,000

    18,000

    12,000

    Maintenance cost

    [Machine hours × Rs 2]

    14,000

    8,000

    4,000

    Materials handing cost

    [Qty of materials × Rs 2]

    8,000

    6,000

    4,000

    Total cost

    Rs 106,000

    Rs 88,000

    Rs 56,000

    Output

    5,000

    4,000

    3,000

    Cost per unit s         = Total cost ÷ Output

    Rs 21.20

    Rs 22.00

    Rs 18.57

     

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