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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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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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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;

[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