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.
[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.
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.
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;
(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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