Activity Based Costing Archives - EP Online Study

Activity Based Costing | TU Solution | Traditional Costing | LAQ

Manju@2050 — Fri, 01 Apr 2022 09:25:49 +0000

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

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Activity Based Costing | TU Questions | Traditional Costing

Manju@2050 — Fri, 01 Apr 2022 06:45:50 +0000

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

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

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

Direct materials and direct labour are recorded for prime cost.

There are two methods to calculate cost per unit.

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

Cost tools are used to find out cost driver rate.

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

Traditional Costing System | Conventional Costing

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

The tradition costing system was designed decades ago for costing.

There are two types of distribution under traditional costing system.

They are primary and secondary distribution of overhead.

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

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

Activity Based Costing | Concept of ABC

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

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

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

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

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

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

· A wide range of products

· Product costing and profitability

· Distribution and controlling overheads appropriately (properly)

ABC helps to better understanding about overhead cost.

It helps to allocation overheads in systematic and scientific way.

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

ABC is also called transaction based costing.

Cost driver | Cost indicator | Cost pools

SN	Activities or Transactions	Cost Drivers
1.	Material procurement, Order execution	No. of order
2.	Material handling	No. of order executed, No. of movement
3.	Store	No. of batch, Requisition raised
4.	Materials handling and dispatch	Order executed, No. materials component, volume
5.	Dispatch of goods	No. of dispatches
6.	Schedule cost, set up cost	Production runs
7.	Materials inspections	No. of inspections
8	Repair and maintenance, short term variable cost	Machine hours
9.	Power	Horse power
10.	Production scheduling	No. of production scheduling
11.	Engineering cost	No. of set up, No. of product change, No. of tool change

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

2054/Cancelled, Q: 7

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

Items	Cost in Rs	Cost drivers
Procurement cost	20,000	No. of order
Repairs	60,000	Machine hours
Set up cost	18,000	No. of production run

Output and related activities are as follows:

Products	Output units	No. of order	Machine hours used	No. of production run
A	10,000	40	15,000	3
B	20,000	60	15,000	6

Required: Overhead rate per unit

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

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

SOLUTION:

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Procurement cost	20,000	No. of order	100	200
Repairs	60,000	Machine hours	30,000	2
Set up cost	18,000	No. of production run	9	2,000

Cost Statement under Activities Based Costing

Particulars		A = 10,000	B = 10,000
Direct materials		××××	××××
Direct labour		××××	××××
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Procurement cost	[No. of order × Rs 200]	8,000	12,000
Repairs	[Machine hours × Rs 2]	30,000	30,000
Set up cost	[No. of production run × Rs 2,000]	6,000	12,000
Total overhead		Rs 44,000	Rs 54,000
Output		10,000	20,000
Overhead per unit = Total overhead ÷ Output		Rs 4.40	Rs 2.70

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

2055, Q: 11

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

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

Particulars	Product P1	Product P2
Actual output in units	3,000	5,000
Machine hours per units	3	2
Labour hour per unit	1	2

(ii) Overhead for the period:

Machine related activity Rs 38,000

Production set up activity Rs 14,000

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

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

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

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

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

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

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

SOLUTION:

Given and working note:

Labour hours	= Output × LHPU		Labour hour rate
P1	= 3,000 × 1	= 3,000	= Total overhead ÷ Total labour hours
P2	= 5,000 × 2	= 10,000	= (Rs 38,000 + 14,000) ÷ 13,000
	Total	= 13,000	= Rs 4


Machine hours	= Output × MHPU		No. of set ups
P1	= 3,000 × 3	= 9,000	= P1 + P2
P2	= 5,000 × 2	= 10,000	= 8 + 6
	Total	= 15,000	= 14

Cost Statement under Traditional Costing

Particulars	P1 = 3,000	P2 = 5,000
Materials	××××	××××
Labour	××××	××××
Prime cost	Nil	Nil
Add: Overheads: (based on LH) [DLH × LH rate]	12,000	40,000
Total overhead	Rs 12,000	Rs 40,000
Output	3,000	5,000
Overhead per unit = Total overhead ÷ Output	Rs 4	Rs 8

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Machine related activity	38,000	Machine hours	19,000	2
Production set up activity	14,000	No. of set ups	14	1,000

Cost Statement under Activities Based Costing

Particulars		P1 = 3,000	P2 = 5,000
Direct materials		××××	××××
Direct labour		××××	××××
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Machine related activity	[Machine hours × Rs 2]	18,000	20,000
Production set up activity	[No. of set up × Rs 1,000]	8,000	6,000
Total overhead		Rs 26,000	Rs 26,000
Output		3,000	5,000
Overhead per unit = Total overhead ÷ Output		Rs 8.67	Rs 5.20

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2056, Q: 10

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

Products	Production	Materials	Material cost	Labour hour	Machine hour	Batches
	units	per unit	Per unit	Per unit	Per unit
P	2,000	2	Rs 3	0.50 hour	1.00 hour	6
Q	1,000	3	Rs 5	0.25 hour	0.25 hour	5
R	500	4	Rs 2	1.00 hour	1.50 hours	4

Total overhead cost and related cost drivers are:

Overheads	Cost drivers	Amount (Rs)
Materials receipt and inspections	No. of batches	30,000
Materials handling	Quantity of materials	18,000
Short-term variable cost	Machine hours	6,000

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

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

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

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

SOLUTION:

Given and working note for cost driver:

No. of batches			Labour hour = Output × LHPU
= P + Q + R			P	= 2,000 × 0.5 hour	= 1,000
= 6 + 5 + 4			Q	= 1,000 × 0.25 hour	= 250
= 15			R	= 500 × 1 hour	= 500
					= 2,000


Machine hour = Output × MHPU			Quantity of materials = Output × Material per unit
P	= 2,000 × 1 hour	= 2,000	P	= 2,000 × 2		= 4,000 units
Q	= 1,000 × 0.25 hour	= 250	Q	= 1,000 × 3		= 3,000 units
R	= 500 × 1.50 hours	= 750	R	= 500 × 4		= 2,000 units
		= 3,000				= 9,000

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Materials receipt and inspections	30,000	No. of batches	15	2,000
Materials handling	18,000	Quantity of materials	9,000	2
Short-term variable cost	6,000	Machine hours	3,000	2

Statement of Cost under Activity Based Costing (ABC)

Particulars		Products
		P = 2,000	Q = 1,000	R = 500
Materials [Output × MCPU]		6,000	5,000	1,000
Labour [Output × LHPU × Rs 4]		4,000	1,000	2,000
Prime cost		10,000	6,000	3,000
Add: Overheads (based on ABC):
Materials receipt and inspections	[No. of batches × Rs 2,000]	12,000	10,000	8,000
Materials handling	[Qty of materials × Rs 2]	8,000	6,000	4,000
Short-term variable cost	[Machine hour × Rs 2]	4,000	500	1,500
Total cost		Rs 34,000	Rs 22,500	Rs 16,500
Output		2,000	1,000	500
Cost per unit (CPU) = Total cost ÷ Output		Rs 17.00	Rs 22.50	Rs 33.00

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

2058, Q: 10

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

Particulars	Product X	Product Y
Output in units	2,000	3,000
Machine hours per unit	2 hours	1 hour
Labour hours per unit	2 hours	3 hours
Production runs	7	3

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

Cost	Cost drivers	Amount
Set up cost	Production runs	20,000
Machine department	Machine hours	14,000
Scheduling cost	Production runs	+ 18,000
		Total 52,000

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

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

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

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

SOLUTION:

Given and working note:

Labour hours	= Output × LHPU		Labour hour rate (LHR)
X	= 2,000 × 2	= 4,000	= Total overhead ÷ Total labour hours
Y	= 3,000 × 3	= 9,000	= Rs 52,000 ÷ 13,000
	Total	= 13,000	= Rs 4


Machine hours	= Output × MHPU		Production runs
X	= 2,000 × 2	= 4,000	= X + Y
Y	= 3,000 × 1	= 3,000	= 7 + 3
	Total	= 7,000	= 10

Cost Statement under Traditional Costing

Particulars	X = 2,000	Y = 3,000
Materials	××××	××××
Labour	××××	××××
Prime cost	Nil	Nil
Add: Overheads: (based on LH) [DLH × LHR]	16,000	36,000
Total overhead	Rs 16,000	Rs 36,000
Output	2,000	3,000
Overhead per unit = Total overhead ÷ Output	Rs 8	Rs 12

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Set up cost	20,000	Production runs	10	2,000
Machine department	14,000	Machine hours	7,000	2
Scheduling cost	18,000	Production runs	10	1,800

Cost Statement under Activities Based Costing

Particulars		X = 2,000	Y = 3,000
Direct materials		××××	××××
Direct labour		××××	××××
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Set up cost	[Production runs × Rs 2,000]	14,000	6,000
Machine department	[Machine hours × Rs 2]	8,000	6,000
Scheduling cost	[Production runs × Rs 1,800]	12,600	5,400
Total overhead		Rs 34,600	Rs 17,400
Output		2,000	3,000
Overhead per unit = Total overhead ÷ Output		Rs 17.30	Rs 5.30

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

2059, Q: 10

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

Products	Units	Machine hours	Production runs	Prime cost	Materials components
A	3,000	9,000	10	Rs 10,000	6,000
B	2,000	4,000	5	Rs 8,000	8,000
Total		13,000	15		14,000

The overhead cost and cost drivers are as follows:

Cost	Cost drivers	Amount
Machine related activities	Machine hours	39,000
Set up costs	Production runs	30,000
Materials handling cost	No. of material components	+ 28,000
		Total 67,000

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

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

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

SOLUTION:

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Machine related activities	39,000	Machine hours	13,000	3
Set up costs	30,000	Production runs	15	2,000
Materials handling cost	28,000	No. of material components	14,000	2

Cost Statement under Activities Based Costing

Particulars		A = 3,000	B = 2,000
Direct materials		××××	××××
Direct labour		××××	××××
Prime cost (given)		10,000	8,000
Add: Overhead (based on ABC)
Machine related activities	[Machine hours × Rs 3]	27,000	12,000
Set up costs	[Production runs × Rs 2,000]	20,000	10,000
Materials handling cost	[No. of material components × Rs 2]	12,000	16,000
Total overhead		Rs 69,000	Rs 46,000
Output		3,000	2,000
Overhead per unit = Total overhead ÷ Output		Rs 23	Rs 23

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

2060/Second, Q: 8

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

Particulars	P1	P2	P3
Units (produced)	3,000	2,000	1,000
Labour hour per unit	2	2	2
Machine hour per unit	4	2	2
Set-up In numbers	8	5	2
Order handled In period	6	4	3
Direct labour rate per hour	Rs 4	Rs 3	Rs 2
Direct material per unit	Rs 16	Rs 18	Rs 24

The overheads for the period are:

Production set-up costs Rs 60,000

Material handling and dispatch Rs 26,000

Repair and maintenance Rs 9,000

Required: (1) Cost driver rate for each overhead

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

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

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

CPU= Rs 40.67; Rs 39; Rs 43]

SOLUTION

Given and working note for cost driver:

No. of set ups			No. of order handling
= P1 + P2 + P3			= P1 + P2 + P3
= 8 + 5 + 2			= 6 + 4 + 3
= 15			= 13

Machine hour = Output × MHPU
P1	= 3,000 × 4 hours	= 12,000
P2	= 2,000 × 2 hours	= 4,000
P3	= 1,000 × 2 hours	= +2,000
		= 18,000

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	Cost Driver Rate
Production set up	60,000	Set up	15	4,000.00
Materials handling	26,000	Order handling	13	2,000.00
Repairs and maintenance	9,000	Machine hour	18,000	0.50

Statement of Cost under Activity Based Costing (ABC)

Particulars		Products
		P1=3,000	P2=2,000	P3=1,000
Materials [Output × MCPU]		48,000	36,000	24,000
Labour [Output × LHPU × Rs ]		24,000	12,000	4,000
Prime cost		72,000	48,000	28,000
Add: Overheads (based on ABC):		.	.	.
Production set up	[Set up × Rs 4,000]	32,000	20,000	8,000
Materials handling	[Order handling × Rs 2,000]	12,000	8,000	6,000
Repairs and maintenance	[Machine hour × Re 0.5]	6,000	2,000	1,000
Total cost		Rs 122,000	Rs 78,000	Rs 43,000
Output		3,000	2,000	1,000
Cost per unit (CPU) = Total cost ÷ Output		Rs 40.67	Rs 39.00	Rs 43.00

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

2061, Q: 7 Or

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

Overhead costs	Cost drives	Amount
Short term variable costs	Machine hours	16,000
Welfare expenses	Direct labour hours	36,000
Set-up costs	Production runs	8,000
Material handling	Quality of materials	24,000

Data for the period are:

Products	A	B	C
Output in units	2,000	2,000	1,000
Materials per unit	3	2	2
Labour hour per unit	2	3	2
Machine hour per unit	2	1.5	2
Production run for the period	4	2	2

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

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

OHR: Rs 18.67; Rs 14 and Rs 18.67;

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

OHR: Rs 17.56; Rs 16.67 and Rs 15.56]

SOLUTION

Given and working note:

Machine hours = Output × MHPU			Machine hour rate
A	= 2,000 units × 2 hours	= 4,000	= Total overhead (given) ÷ Total MH
B	= 2,000 units × 1.5 hours	= 3,000	= Rs 84,000 ÷ 9,000 hours
C	= 1,000 units × 2 hours	= 2,000	= Rs 28/3 or 9.333
Total		= 9,000*

Cost Statement under Traditional Costing

Particulars	A	B	C
Materials	××××	××××	××××
Labour	××××	××××	××××
Prime cost	Nil	Nil	Nil
Add: Overheads (based on MH) [MH × MH rate]:	37,333	28,000	18,667
Total overhead	Rs 37,333	Rs 28,000	Rs 18,667
Output	2,000	2,000	1,000
Overhead per unit = Total overhead ÷ Output	Rs 18.67	Rs 14.00	Rs 18.67

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total CD	CDR
Short term variance	16,000	Machine hour	9,000*	16/9
Welfare expenses	36,000	Direct labour hour	12,000	3.00
Set up cost	8,000	Production runs	8	1,000.00
Materials handling	24,000	Quantity of materials	12,000	2.00

Given and working note for cost driver:

Direct labour hour = Output × DLHPU					Production runs
A		= 2,000 units × 2 hours		= 4,000	= A + B + C
B		= 2,000 units × 3 hours		= 6,000	= 4 + 2 + 2
C		= 1,000 units × 2 hours		= 2,000	= 8
		Total		= 12,000

Qty of materials = Output × MPU
A	= 2,000 units × 3		= 6,000
B	= 2,000 units × 2		= 4,000
C	= 1,000 units × 2		= 2,000
	Total		= 12,000

Statement of Cost under Activity Based Costing (ABC)

Particulars		Products
		A	B	C
Materials		××××	××××	××××
Labour		××××	××××	××××
Prime cost		Nil	Nil	Nil
Add: Overheads (based on ABC)
Short term variance	[Machine hour × Rs 16/9]	7,111	5,333	3,556
Welfare expenses	[Direct labour hour × Rs 3]	12,000	18,000	6,000
Set up cost	[Production runs × Rs 1,000]	4,000	2,000	2,000
Materials handling	[Quantity of materials × Rs 2]	12,000	8,000	4,000
Total overhead		Rs 35,111	Rs 33,333	Rs 15,556
Output		2,000	2,000	1,000
Overhead per unit = Total overhead ÷ Output		Rs 17.56	Rs 16.67	Rs 15.56

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

2061/second, Q: 7

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

Particulars	PX	PY
Output in units	4,000	6,000
Labour hour per unit	3/4	1/2
Number of production run	20	30
Number of supervision per production run	4	5
Machine hour per unit	1.5	1

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

Overheads:	Production setting	Supervision	Machine operation
Amount:	Rs 25,000	Rs 23,000	Rs 24,000

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

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

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

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

SOLUTION

Given and working note:

Labour hours = Output × Labour hours per unit			Labour hours rate
X	= 4,000 × 3/4 hour	= 3,000	= Total overhead ÷ Total labour hours
Y	= 6,000 × 1/2 hour	= 3,000	= Rs 72,000 ÷ 6,000 hours
Total		= 6,000 hours	= Rs 12 per hour

Cost Statement under Traditional Costing

Particulars	X	Y
Materials	××××	××××
Labour	××××	××××
Prime cost	××××	××××
Add: Overheads: (based on LH) [DLH × LH rate]	36,000	36,000
Total overhead	Rs 36,000	Rs 36,000
Output	4,000	6,000
Overhead per unit = Total overhead ÷ Output	Rs 9	Rs 6

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total CD	CDR
Production setting	25,000	Production runs	50	500
Supervision	23,000	No. of supervision	230	100
Machine operated	24,000	Machine hour	12,000	2

Given and working note for cost driver:

Production runs	No. of supervision	= Supervision × Production runs
= X + Y	X	= 4 × 20	= 80
= 20 + 30	Y	= 5 × 30	= 150
= 50		Total	= 230

	Machine hour	= Output × MHPU
	X	= 4,000 × 1.5	= 6,000
	Y	= 6,000 × 1	= 6,000
		Total	= 12,000

Cost Statement under Activities Based Costing

Particulars		X	Y
Direct materials		××××	××××
Direct labour		××××	××××
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Production setting	[Production runs × Rs 500]	10,000	15,000
Supervision	[No of supervision × Rs 100]	8,000	15,000
Machine operated	[Machine hours × Rs 2]	12,000	12,000
Total overhead		Rs 30,000	Rs 42,000
Output		4,000	6,000
Overhead per unit = Total overhead ÷ Output		Rs 7.5	Rs 7.0

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

2062, Q: 7 Or

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

Products	Output in pieces	Material cost per piece	Labour hour per piece	Production scheduling per 50 pieces
Jar	400	Rs 25	5	3
Plate	600	Rs 30	2.5	3
Bowl	500	Rs 20	3	4

Wage rate per hour is Rs 4

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

One sales order execution contains 100 pieces of each.

The overhead for the period are outlined below:

Production scheduling	Rs 20,000
Order execution expenses	Rs 15,000
Inspection work expenses	Rs 18,000

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

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

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

CPU = Rs 98; Rs 66.50; Rs 63.80;

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

SOLUTION

Given and working note:

Direct labour hour (DLH) = Output × LHPU		DLH rate	= Total overhead ÷ Total DLH
Jar = 400 × 5	= 2,000		= Rs 53,000 ÷ 5,000 hours
Plate = 600 × 2.5	= 1,500		= Rs 10.60 per hour
Bowl = 500 × 3	= 1,500
Total	= 5,000 hours

Cost Statement under Traditional Costing

Particulars	Jar	Plate	Bowl
Direct Materials [Output × MCPU]	10,000	18,000	10,000
Direct Labour [Output × LHPU × Rs 4]	8,000	6,000	6,000
Prime cost	18,000	24,000	16,000
Add: Overhead (based on labour hours, Output × Rs 10.60)	21,200	15,900	15,900
Total cost	Rs 39,200	Rs 39,900	Rs 31,900
Output	400	600	500
Cost per unit = Total cost ÷ Output	Rs 98.00	Rs 66.50	Rs 63.80

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver	Total Cost Driver	CDR
Production scheduling	20,000	Production schedule	100	200
Order execution	15,000	Order execution	15	1,000
Inspection work	18,000	No. of inspection	300	60

Given and working note for cost driver:

Production schedule					Order execution
50 pieces needed		= 3 Production run			100 pieces needed	= 1 order
400 jars need		= 3 × 400 ÷ 50	= 24		400 jars need	= 400 ÷ 100	= 4
600 plate need		= 3 × 600 ÷ 50	= 36		600 plate need	= 600 ÷ 100	= 6
500 bowl need		= 4 × 500 ÷ 50	= 40		500 bowl need	= 500 ÷ 100	= 5
		Total	= 100			Total	= 15

No. of inspection
25 pieces needed	= 5 inspection
400 jars need	= 5 × 400 ÷ 25			= 80
600 plate need	= 5 × 600 ÷ 25			= 120
500 bowl need	= 5 × 500 ÷ 25			= 100
	Total			= 300

Cost Statement under Activities Based Costing

Particulars		Jar	Plate	Bowl
Direct Materials [Output × MCPU]		10,000	10,000	18,000
Direct Labour [Output × LHPU × Rs 4]		8,000	8,000	6,000
Prime cost		18,000	24,000	16,000
Add: Overhead (based on ABC)
Schedule costing	[Production runs × Rs 200]	4,800	7,200	8,000
Order execution	[Order execution × Rs 1,000]	4,000	6,000	5,000
Inspection work	[No. of inspection × Rs 60]	4,800	7,200	6,000
Total cost		Rs 31,600	44,400	35,000
Output		400	600	500
Cost per unit = Total cost ÷ Output		Rs 79	Rs 74	Rs 70

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

2063, Q: 8

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

	Product X	Product Y
Output In units	500	1,000
Machine hour per unit	4	2
Direct labour hour per unit	2	2
Production run for the period	5	8

The overhead for the period and cost drives are:

Cost items	Amount	Cost drives
Short term variable costs	16,000	Machine hours
Scheduling costs	10,400	Production runs
Set up costs	5,200	Production runs
Indirect labour	9,000	Direct labour hours

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

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

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

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

SOLUTION

Calculation of Cost Driver Rate

Activities	Amount	Cost Driver (CD)	Total CD	CD Rate
Short term variable cost	16,000	Machine hours	4,000	4
Scheduling cost	10,400	Production runs	13	800
Set up cost	5,200	Production runs	13	400
Indirect labour	9,000	Direct labour hour	3,000	3

Given and working note for cost driver:

Machine hour	= Output × MHPU		DLH	= Output × DLHPU
X	= 500 × 4 hours	= 2,000	X	= 500 × 2 hours	= 1,000
Y	= 1,000 × 2 hours	= 2,000	Y	= 1,000 × 2 hours	= 2,000
	Total	= 4,000		Total	= 3,000

Production runs
= X + Y
= 5 + 8
= 13

Cost Statement under Activities Based Costing

Particulars		A	B
Direct Materials
Direct Labour
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Short term variable cost	[Machine hours × Rs 4]	8,000	8,000
Schedule costing	[Production runs × Rs 800]	4,000	6,400
Set up cost	[Production runs × Rs 400]	2,000	3,200
Indirect labour	[Direct Labour × Rs 3]	3,000	6,000
Total overhead		Rs 17,000	Rs 23,600
Output		500	1,000
Overhead per unit = Total overhead ÷ Output		Rs 34.00	Rs 23.60

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

2064, Q: 8

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

Particulars	Product A	Product B
Output In units	1,000	1,000
Machine hour per unit	1.5	1
Direct labour hour per unit	2	3
Production run for the period	3	2

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

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

Cost items	Cost drives	% of Apportionment
Indirect labour	Direct labour hours	62.5%
Scheduling costs	Production runs	25%
Machine related costs	Machine hours	12.5%

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

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

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

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

SOLUTION

Given and working note:

Direct labour hour = Output × DLHPU
A	= 1,000 units × 2 hours			= 2,000
B	= 1,000 units × 3 hours			= 3,000
	Total			= 5,000


Total overhead
Labour hour rate			= Total overhead ÷ Total labour hour
Rs 16			= Total overhead ÷ 5,000 DLH
Total overhead			= Rs 16 × 5,000 DLH
			= Rs 80,000

Again,
Indirect labour		= 80,000@62.5%			= Rs 50,000
Schedule cost		= 80,000@25%			= Rs 20,000
Machine expenses		= 80,000@12.5%			= Rs 10,000

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver (CD)	Total CD	CD Rate
Indirect labour	50,000	Direct labour hour	5,000	10
Schedule cost	20,000	Production runs	5	4,000
Machine related cost	10,000	Machine hour	2,500	4

Given and working note for cost driver:

Direct labour hour	= Output × DLHPU
A	= 1,000 units × 2 hours	= 2,000
B	= 1,000 units × 3 hours	= 3,000
	Total	= 5,000

Machine hour	= Output × MHPU
A	= 1,000 × 1.5 hours	= 1,500
B	= 1,000 × 1 hour	= 1,000
	Total	= 2,500

Production runs
= A + B
= 3 + 2
= 5

Cost Statement under Activities Based Costing

Particulars		A	B
Direct materials
Direct labour
Prime cost		Nil	Nil
Add: Overhead (based on ABC)
Indirect labour	[Direct labour × Rs 10]	20,000	30,000
Schedule costing	[Production runs × Rs 4,000]	12,000	8,000
Machine expenses	[Machine hours × Rs 4]	6,000	4,000
Total overhead		Rs 38,000	Rs 42,000
Output		1,000	1,000
Overhead per unit = Total overhead ÷ Output		Rs 38	Rs 42

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

TU: 2067, Q: 8 Or

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

	A	B
Output in units	6,000	4,000
Labour hour per unit	4	2
Machine hour per unit	2	1
Production runs	6	4

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

	Cost driver	Amount (Rs)
Set up cost	Production run	30,000
Machine department cost (MDC)	Machine hours	64,000
Scheduling cost	Production run	40,000

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

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

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

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

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

SOLUTION:

Calculation of Cost Driver Rate

Activities	Amount	Cost Driver (CD)	Total CD	CD Rate
1	2	3	4	5 = 2 ÷ 4
Set up cost	30,000	Production run	10	3,000
Machine department cost (MDC)	64,000	Machine hours	16,000	4
Scheduling cost	40,000	Production run	10	4,000

Working note for total cost driver:

Machine hours	= Output × MHPU		Production runs
A	= 6,000 × 2	= 12,000	= A + B
B	= 4,000 × 1	= 4,000	= 6 + 4
		= 16,000	= 10

Cost Statement under Activities Based Costing

Particulars		A = 6,000	B = 4,000
Direct materials
Direct labour
Prime cost (given)		Nil	Nil
Add: Overhead (based on ABC)
Set up cost	[Production runs × Rs 3,000]	18,000	12,000
MDC	[Machine hours × Rs 4]	48,000	16,000
Scheduling cost	[Production runs × Rs 4,000]	24,000	16,000
Total overhead		Rs 90,000	Rs 44,000
Output		6,000	4,000
Overhead per unit = Total overhead ÷ Output		Rs 15	Rs 11

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

TU: 2069, Q: 8 Or

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

	Amount (Rs)	Cost driver
Production set up cost	30,000	Production run
Machine department cost (MDC)	40,000	Machine hours
Selling and distribution cost	20,000	Order execution
Indirect labour cost	50,000	DLH
	140,000

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

Products	Output	DLH	MH	Production	Sales per	Price cost
	Units	Per unit	Per unit	run	order	per unit
X	20,000	3	3/4	40	400 units	8
Y	10,000	4	1/2	20	200 units	5

Required: Total cost per unit of each products

[Answer:

SOLUTION:

Calculation of Cost Driver Rate

Activities	Amount	Cost Driver (CD)	Total CD	CD Rate
1	2	3	4	5 = 2 ÷ 4
Production set up cost	30,000	Production run	60	500
Machine department cost (MDC)	40,000	Machine hours	20,000	2
Selling and distribution cost	20,000	Order execution	100	200
Indirect labour cost	50,000	DLH	100,000	0.5

Working note for total cost driver:

Production run			Order execution = Output ÷ Order unit
= X + Y			X = 20,000 ÷ 400 units			= 50
= 40 + 20			Y = 10,000 ÷ 200 units			= 50
= 60						= 100


Machine hours	= Output × MHPU			DLH	= Output × DLH per unit
X	= 20,000 × 3/4	= 15,000		X	= 20,000 × 3		= 60,000
Y	= 10,000 × 1/2	= 5,000		Y	= 10,000 × 4		= 40,000
		= 20,000					= 100,000

Cost Statement under Activities Based Costing

Particulars		X = 20,000	Y = 10,000
Direct materials [Output × Price cost per unit]		160,000	50,000
Direct labour {Output × LHPU × Rs]		Nil	Nil
Prime cost		160,000	50,000
Add: Overhead (based on ABC)
Production set up cost	[Production run × Rs 500]	20,000	10,000
MDC	[Machine hours × Rs 2]	20,000	10,000
S&D cost	[Order execution × Rs 200]	10,000	10,000
Indirect labour cost	[DLH × Re 0.50]	30,000	20,000
Total cost		Rs 250,000	Rs 100,000
Output		20,000	20,000
Cost per unit = Total overhead ÷ Output		Rs 12.50	Rs 10.00

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

2070, Q: 8

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

	Product X	Product Y	Product Z
Output in units	2,000	3,000	5,000
Direct labour hours per units	1.5	1	0.8
Number of order executed	5	2	3
Number of set ups	2	2	3

The overhead costs and cost drivers are:

	Cost driver	Amount (Rs)
Production set up cost	Set ups	14,000
Indirect labour	Direct labour hours	10,000
Materials handling and dispatch	Order execution	+ 6,000
		30,000

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

[Answer:

SOLUTION:

Cost Statement under Conventional Method

Particulars	X	Y	Z
Direct materials
Direct labour
Prime cost	Nil	Nil	Nil
Add: Overhead (based on LH; LH × LHR)	9,000	9,000	12,000
Total overhead	Rs 9,000	Rs 9,000	Rs 12,000
Output	2,000	3,000	5,000
Cost per unit = Total overhead ÷ Output	Rs 4.50	Rs 3.00	Rs 2.40

Given and working note:

Labour hours (LH)	= Output × LHPU
X	= 2,000 × 1.5	= 3,000
Y	= 3,000 × 1	= 3,000
Z	= 5,000 × 0.8	= 4,000
	Total	10,000

Labour hour rate (LHR)			Order execution
= Total overhead ÷ Total labour hours			= X + Y + Z
= Rs 30,000 ÷ 10,000 hours			= 5 + 2 + 3
= Rs 3			= 10

Set ups
= X + Y + Z
= 2 + 2 + 3
= 7

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver (CD)	Total CD	CD Rate
Production set up cost	14,000	Set ups	7	2,000
Indirect labour	10,000	Direct labour hours	10,000	1
Materials handling and dispatch (MHD)	6,000	Order execution	10	600

Cost Statement under Activities Based Costing

Particulars		X	Y	Z
Direct materials
Direct labour
Prime cost		Nil	Nil	Nil
Add: Overhead (based on ABC)
Production set up cost	[Set ups × Rs 2,000]	4,000	4,000	6,000
Indirect labour	[Direct labour hour × Re 1]	3,000	3,000	4,000
MHD	[Orders executed × Rs 600]	3,000	1,200	1,800
Total overhead		Rs 10,000	Rs 8,200	Rs 11,800
Output		2,000	3,000	5,000
Cost per unit = Total overhead ÷ Output		Rs 5	Rs 2.56	Rs 2.36

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

TU: 2071, Q: 8 Or

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

Detailed information are as follows:

Products	Output	Raw materials	Labour hour	Labour	MH	No. of product	No. of	No. of
	In units	Per unit	Per unit	Hour rate	Per unit	Delivered	Set ups	Receipts
P1	30,000	Rs 8	0.5	Rs 10	3	8	20	30
P2	20,000	Rs 6	0.5	Rs 10	2	5	15	20

Overhead cost

Set up cost	Rs 7,000
Machine related cost	Rs 65,000
Receiving cost	Rs 20,000
Packing cost	+ Rs 26,000
Total	Rs 118,000

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

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

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

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

SOLUTION:

Calculation of Cost Driver Rate

Activities	Amount	Cost Driver (CD)	Total CD	CD Rate
1	2	3	4	5 = 2 ÷ 4
Set up cost	7,000	No. of set ups	35	200
Machine related cost	65,000	Machine hours	130,000	0.5
Receiving cost	20,000	No. of receipt	50	400
Packing cost	26,000	No. of delivered	13	2,000

Working note for total cost driver:

Set ups			No. of receipts	No. of product delivered
= P1 + P2			= P1 + P2	= P1 + P2
= 20 + 15			= 30 + 20	= 8 + 5
= 35			= 50	= 13

Machine hours	= Output × MHPU
P1	= 30,000 × 3	= 90,000
P2	= 20,000 × 2	= 40,000
		= 130,000

Cost Statement under Activities Based Costing

Particulars		P1 = 30,000	P2 = 20,000
Direct materials [Output × RMPU]		240,000	120,000
Direct labour {Output × LHPU × Rs 10]		150,000	100,000
Prime cost		390,000	220,000
Add: Overhead (based on ABC)
Set up cost	[No. of set ups × Rs 200]	4,000	3,000
Machine related cost	[Machine hours × Re 0.5]	45,000	20,000
Receiving cost	[No. of receipt × Rs 400]	12,000	8,000
Packing cost	[No. of delivered × Rs 2,000]	16,000	10,000
Total cost		Rs 467,000	Rs 261,000
Output		30,000	20,000
Cost per unit = Total overhead ÷ Output		Rs 15.57	Rs 13.35

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

2074, Q: 11

A Company produces three products A, B and C. all the products are produced on the same equipment and similar processes.

The information for the last period are given below:

Products	Output units	Labour hours Per unit	Machine hours Per unit	Materials cost Per unit	Production runs
A	2,000	2	2	8	10
B	4,000	3	2	10	30
C	8,000	4	2	12	20

Direct labour cost per unit Rs 4

The overhead cost and cost driver are as follow:

Activities	Cost	Cost drivers
Schedule cost	Rs 90,000	Production runs
Repair cost	Rs 140,000	Machine hours
Set up cost	Rs 180,000	Production runs
Indirect labour	Rs 144,000	DLH
	Rs 554,000

Required: Cost per unit under (a) conventional method using machine hour; (b) activity based costing system

Given and working note:

Machine hours	= Output × LHPU		Machine hours rate (MHR)
A	= 2,000 × 2	= 4,000	= Total overhead ÷ Total machine hours
B	= 4,000 × 2	= 8,000	= Rs 554,000 ÷ 28,000 hours
C	= 8,000 × 2	= 16,000	= Rs 19.79
	Total	= 28,000

Cost Statement under Conventional Costing

Particulars	Products
	A = 2,000	B = 4,000	C = 8,000
Direct materials [Output × MCPU]	16,000	40,000	96,000
Direct labour [Output × LHPU × Rs 4]	16,000	48,000	128,000
Prime cost	32,000	88,000	224,000
Add: Overhead (based on labour hours):
Machine expenses (MH × MHR)	49,160	158,320	316,640
Total cost	Rs 111,160	Rs 246,320	Rs 540,640
Output	2,000	4,000	8,000
Cost per unit s = Total cost ÷ Output	Rs 55.58	Rs 51.58	Rs 67.58

Calculation of Cost Driver Rate

Activities	Amount	Cost Driver (CD)	Total CD	CD Rate
1	2	3	4	5 = 2 ÷ 4
Schedule cost	90,000	Production runs	60	1,500
Repair cost	140,000	Machine hours	28,000	5
Set up cost	180,000	Production runs	60	3,000
Indirect labour	144,000	DLH	48,000	3

Working note for total cost driver:

Labour hours	= Output × LHPU		Production runs
A	= 2,000 × 2	= 4,000	= A+ B + C
B	= 4,000 × 3	= 12,000	= 10 + 30 + 20
C	= 8,000 × 4	= 32,000	= 60
		= 48,000

Cost Statement under ABC

Particulars		Products
		A	B	C
Direct materials [Output × RCPU]		16,000	40,000	96,000
Direct labour [Output × LHPU × Rs 4]		16,000	48,000	128,000
Prime cost		32,000	88,000	224,000
Add: Overhead (based on ABC):
Schedule cost	[Production runs × Rs 1,500]	15,000	45,000	30,000
Repair cost	[Machine hours × Rs 5]	20,000	40,000	80,000
Set up cost	[Production runs × Rs 3,000]	30,000	90,000	60,000
Indirect labour	[DLH × Rs 3]	12,000	36,000	96,000
Total cost		Rs 109,000	Rs 299,000	Rs 490,000
Output		2,000	4,000	8,000
Cost per unit s = Total cost ÷ Output		Rs 54.50	Rs 74.75	Rs 61.25

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

2077, Q: 11

Following are the particulars of an industry manufacturing two products X and Y:

Products	Output units	Machine hours	Production run	No. of order	Prime cost
X	15,000	2,000	20	60	Rs 110,000
Y	20,000	3,000	40	90	Rs 90,000

The overhead cost and cost driver are as follow:

Activities	Cost drivers	Overheads
Maintenance cost	Machine hours	Rs 250,000
Set up cost	No. of production runs	Rs 300,000
Procurement cost	No. of order executed	Rs 300,000

Required: Cost per unit under (a) conventional method using machine hour; (b) activity based costing system

[Answer: (a) Total cost X = Rs 450,000; Y = Rs 600,000; CPU: X = Rs 30; Y = Rs 30;

(b) Total cost X = Rs 430,000; Y = Rs 620,000; CPU: X = Rs 28.67; Y = Rs 31;

*MHR = Rs 170; *CDR: 50; 5,000; 2,000;

SOLUTION

Given and working note:

Total overhead = 250,000 + 300,000 + 300,000 = Rs 850,000
Total machine hours = 2,000 + 3,000 = 5,000 hours

Machine hour rate (MHR)	= Total overhead ÷ Total machine hours
	= Rs 850,000 ÷ 5,000 MH
	= Rs 170

Cost Statement under Conventional Method

Particulars	X	Y
Direct materials
Direct labour
Prime cost (given)	110,000	90,000
Add: Overhead (based on MH; MH × MHR)	340,000	510,000
Total cost	Rs 450,000	Rs 600,000
Output	15,000	20,000
Cost per unit = Total overhead ÷ Output	Rs 30	Rs 30

Given and working note for cost driver:

Machine hour = X + Y = 2,000 + 3,000 = 5,000

Production runs = X + Y = 20 + 40 = 60

No. of orders = X + Y = 60 + 90 = 150

Calculation of Cost Driver Rate

Activities	Cost	Cost Driver (CD)	Total CD	CD Rate
Maintenance cost	250,000	Machine hours	5,000	50
Set up cost	300,000	No. of production runs	60	5,000
Procurement cost	300,000	No. of order executed	150	2,000

Cost Statement under Activities Based Costing

Particulars		A	B
Direct materials
Direct labour
Prime cost (given)		110,000	90,000
Add: Overhead (based on ABC)
Materials cost	[Machine hours × Rs 50]	100,000	150,000
Set up cost	[Production runs × Rs 5,000]	100,000	200,000
Procurement cost	[No. of orders × Rs 2,000]	120,000	180,000
Total cost		Rs 430,000	Rs 620,000
Output		15,000	20,000
Cost per unit = Total overhead ÷ Output		Rs 28.67	Rs 31

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