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OY
advance Cost Accounting (M4 ¢
omy
140 woe
gp eee
= S
= a ne
= Activity Based Costing S
= S
| S
eS
|
i ig Object
fier studying this chapter, you should be able 10 know
> Concept of ABC
> Steps in ABC
‘Synopsis __——
Introduction
Conventional Allocation of
Activity Based Costing
Cis used for decision making
‘Common Cost
Areas in which AB
Practical steps in ABC
on berween traditional costing and ABC
See
Distinct
Benefits of ABC
8 Case Sudies
9. Illustrations
10. Exercises
10.1 Theory Questions
10.2. Objective Questions
10.3 Practical Problem
Ss yo LT cc mile, ee
jp Based Costing
yeti”
RODUCTION
1 ynder traditional costing, oy, 7 ee
rates decided in aq ‘erheads
cov" advance. Fo. Allocat
re¢neads a 100% of factory cost, yen mamvle, fed, apportioned and absorbed on the bas!
ow cost of @ product is decided oad per | factory overheads are 80% of wages. office
ota) “4 by these rates canno led on the bane labour hour, overh a Pe OF ae etc
a |. Hence, the problem: He accurate The of these rates decided § per mac ME oerheads
; D a . They ar ; advance. Ove!
in am is resolved by Activity Ba Ver absorption ave ute different from the actual overheads
sed Costing under absorption of overheads arises. Ths
pl
ro? CONVENTIONAL
2 0 ALLOCATION OF ce,
MMON COST
il
sof
Service and Production
Product
Overheads duction Production
Departments Lines
SS ame] I
Assigning Costs usi |
Measures of Service Uc, “Allocating Costs using
Fi ‘Sage Measures of Volume |
{ ig. 4.1 : Conventional Allocation of Common Costs __|
ACTIVITY BASED COSTING
a recent development in the field of costing. Its
formance information tracing the significant activities o!
ate attempt is made to absorb overheads into product cos: a more realistic basis.
them or causes them to be
Under this system, Costs are grouped according to what drives
incurred. Overheads are related to the forces behind overheads cost. These forces are called as
cost drivers. Cost drivers are those activities or transactions that are significant determinants of
costs. A cost driver is an activity, which generates cost. ‘ABC is based on belief that activities cause
cost and therefore, there should be a link between activities and costs.
Main Activities and Cost Drivers : _
Main Acti - ~~ Main Cost Drivers
collection of financial and operational
Under this
3
f the firm to product cost.
Iris
Customer Order Processing Order Value
Order Source (New / Old Customer)
“Order Source (Customer Location)
Material Planning / Acquisition Number of Material Transactions
_ Volume of Material Recep
| Volume of Material Orders
Inspection Plans
Number of Problem Suppliers
Gauge Usage
Lack of Good Quality
Production Control ingineering Changes
Supplies Performance
Number of Parts Operational
Make Versus Buy Policy
Number of Machine Chi
Production | Number to be Supervised
Shift Patterns
Industrial Relations Issues
Flow of Product from Assembly
Volume of Service Parts / Kit Packing
Inspection
ges 142
Maintenance
Systems
{Control Quality
Financial A
ounting
Management Accounting,
Personnel
Fig.
Prime Costs
Direct Materials
Direct Labour
Other Direct Costs
Overheads _
“Production
[R&D
‘Administration
Marketing
Sales
Distribution
Maintenance schedule
Capital Epes
Activily Levels
| Number of S
Number of
Adeque °t of
| nspesion
| Numeral f Ac rout z Transactions
Number of Himes AC counts Produced
Volume of Activity
Co-ordinated ‘shipping Process
re vcuracy of Feeder systems
t Rev quirements
Management
Requirements
Product
Costs
_
‘Application of
Cost Drivers
Non-Product
Costs
Product
Lines
Activity Cost
Pools
Service Department “oan
and Factory AT]
Overheads
reeets | | | |
X\ | |
|| — |
| -—>*_D HT]
} i} ||
| ( | iI
| Lo) |
i | 7 | |
|_| Hl] |
Assigning | } ||
Costs of | | | fH] |
Individual =~ ___5/ IH |
Activities ( \_I | |
JEL
Application
of Cost
Driver Rates
“N
advance Cost ACCONMIIME (MC as rased Costing
r IN WHICH ABC IS USED Fo!
mation generated by ABC is use
Product Pricing
Transfer pricing
Capital investment decisions
product line profitability
Make or Buy decisions
al Development of new product
vii) Market segmentation
viii) Closure of plant decision
0 Off shore production evaluation
pRACTICAL STEPS IN ABC
jdentification of Activities
ivity is considere i gnific:
An i ie ed significant when total cost of the activity is significant
Unit level Activities
Cost of some activities is co-related to the number of units produced. Direct material depends
snanis produced. Inspection is the unit level activity. Cost of inspection and testing depends on
production. These activities occur every time a product is made.
Batch level Activities
Cost of certain activities depends on the number of batches of units produced. For example
3) Ordering Machine of material
b) Machine set up
¢) Inspection of products
d) Testing of products
e) Loading machines
Itdoes not matter how many units are produced in the batch
9 Product Line Activities
Cost of certain activities depends on creation of a new product line and its maintenance : For
aample :
a) Advertising cost
b) Product designing
©) Keeping technical drawings of products
d) Engineering changes made in the assembly line
e) Warehousing for each line
@ Facility Activities
Certain cost is related to maintaining of b
For example :
i) Production manager's salaries
u) Advertising compaigns
ul) Maintenance
lv) Building depreciation
v) Property taxes
i) Plant security
vii) Insurance
pe of unit level, batch le
ct either directly or through
ben, atilty level cost are kept separate
“cause allocation has 10 be made on an a
R re M
DECISION MAKING
d for d :
lecision making in the following areas
i
ii)
uildings and facilities.
vel and product line activities are easily allocated to a specitic
allocation of pooled cost
from product cost and are not allocated to individual units
rbitrary basis viz sq. ft., no of divisions and so on. Se ee
144
For example ; ordering of materials, rece"
Support, production, set up etc.
2. Compute total
For example : total cost of ordering, 1014
Support etc,
3. Decide the most appropriate cost driver
No of production set ups, No of items Sol &,
Total cost of an Activi
rate = Total volume of activity cost driver
(000 and No of order
influences the cost of
For example : No of orders, No of delivers,
For example : Total ordering cost is © 50.
Cost per order = 30,000
Charge activity cost to the p!
Workout the Activity cost driver
Advance Cost Accounting (yo
a
22
(Cost poo!)
cost of each activity
| cost of
an activity.
30,000
= order
1,000 50 per
= Activity consumed x Activity cost driver rate
For example
No of purchase orders
For product X 500 and Y 500 are 15 a!
ind 25
Activity cost driver rate is @ 200 per order.
Ordering cost charged :
X 500 = 15 x 200 = 3,000
Y 500 = 25 x 200= 5,000
6.
| Point of
Distinction
[As Basic
assumption,
2. Computation of |
DISTINCTION BI
EIWEEN IRE
Traditional Costing
| Product ‘consumes resources in the
for
Overheads are computed
production and service centres
of Direct Labour hours or machine
hours
iving of deliveries,
for each activity. Cost driver is i
ry,
RADITIONAL COSTING AND ABC
ratio of volume ¢ of production oe!
Overheads are é absorbed on the basis
i ”
Inspection of delve &,
s,
q
receiving. deliveries’ total Cost of
Cy,
‘y
is 1,000.
roduct or job or PFOCESS*
Activity Based Costing
Product consumes Tesourcesing
ratio of volume of activities
Overheads are computed aging
wise such as setting cost, order,
| cost etc. :
Overheads are absorbed on the
basis of activities consumed,
It is not reliable because it is not
accurate
It is reliable because of
accuracy
It is subjective approach
It is objective approach
overheads
3. Bass of
Absorption
(4. Reliability
5. Nature of
| approach
6 Control
7. Irrelevant
activities
8. Mechanism
| No control over activities which cause
| overheads
It does not identify irrelevant activities
Overheads are apportioned over
Control over activities which caus
| overheads.
It identifies irrelevant activities
Overheads are calculated fore
production departments and service | activity and then charged
departments and service department | various cost objects
overheads are reapportioned over
production departments and then
products are charged on some basis Based
ct?
ee
ee ~ ordering
1
— Receiving
“| Inspection
Pea Engineerin
Material
handling
To. Packing
11. Customer visit
12, Sales ~ order
| processing
13. Delivery of
Goods
14. Reworking
15. Machining
16. Purchasing
yy hep
7. Expedited
Rework units
d Costing
Receipts of materials
Inspections
Engineering hours
or
Production orders
Testing and Inspection
|| Hours of
Shelf stocking time
Orders executed
eee
Sales deliveries
Customer visits
Sales order executed
Deliveries
Machine hours
Purchase orders
No. of deliverie
eee deliveries
owing calculati rrr
ion of cost driver rates :
Cost driver rivet
Number of Rate per cost
Production R
ion Runs je Quality. Control Cost_
ao = No, of production Runs
Production Runs : Set up cost
tachi = Novof production Runs
Machine set ups or
= No of machine set UPS
Set up hours or
—_|—_—_—_—__— eee Set up hours ee
ea a Total ordering cost
=~ No. of orders a seca
_ Total Receiving cost
No of Receipts of materials _ cca
_ Total inspection. cost
= "No of inspections
Total engineering cost
ring hours
= No of enginea!
or
No of production orders
tion cost
| Total Testing and Inspec! t
sting and Inspection
No. of hours of Te:
| Total shelf stocking cost
No. of hours fshelf stocking
Total Material jandling cost
‘de executed
No of orders
Total packing cost
No of sales deliveries
Total customer visit COSt
No of customer visits
| Total sales order processins cost
No of sales orders executed
Cost of delivery
No of deliveries
| Total Rework cost
No of rework units
Total machining cost
No of machine hours
‘Total Purchasing cost
| No of purchase orders
t
| Total Expedited delivery cost
| No of deliveries i wTwE0_ _——
Cost Accounting (M.Comy
Sen
16 Advance
rn aes Rate per Cost drive,
Nature of Activity Cost driver
ni | Number Total Testing Cost
18. Hours
Testing Testing hours No of Testing
_ Total cost of sales visits
19. Sales visit No of visits No of visits
>—— oval production conto cox
20. Production | Production orders No. of production orders
Sea = Material Management cost”
21. Materials | Requisitions No. of Requisitions
__Management ooo ag ‘Documentation cost
| 22. Documentation | No. of Bookings No. of Bookings _ _
Cost of Sales administration
No. of Customers
23. Sales. “| No, of Customers
____ Administration a Cost of Markein
No. of Customers
x
Cost of Engineenn; Desi
No. of Bookings
24. Marketing No. of Custome!
2s. Engineering | No. of Bookings
7. BENEFITS OF ABC
I¢ Brings accuracy and reliability in product cost.
2. Provide more realistic product cost. ae
7 i i + by eliminating unnecessary 3 .
3. Helps in reducing cost by e! 8 2 ioceses, CUSOeTS a depen
formation on transaction volumes, which are usef,,
| of cost centres.
_4, It traces costs to areas of managerial respons!
besides the product cost. : Ae
_s. Ithelps in managerial decision making because of reliable product cost.
6. Ithelps in fixation of selling price of a product.
7.
ABC provided cost driver rates and inf c
\d performance appraisal
for cost management ant
8. CASE STUDIES
Case 1: 7 —_ C
[REAL - WORLD FOCUS
How Daton Technologies identifies High-
Daton Technologies asks five questions in identifying activities as high-value~
1. Is the activity of value to an external customer?
Value-Added and Low-Value-Added Activities
added or low-value-added
2. Is the activity required to meet corporate rules?
(3. Is the activity required for sound business practices?
4. Is the activity of value to an internal customer?
5. Is the activity a waste?
The company classifies positive answers to the first two questions under high-value-added activities and
| the last three questions under low-value-added activities and tries to eliminate any activity in questo? s
| For questions 3 and 4, the company tries to improve the activity or reduces its frequency Otherwise." !
| eliminate that activity. Examples of high-value-added activities in Daton Technologies are 2!
| extrusion runs, shipping, designing parts and making tools, Examples of low-value-add a ctivities are
up, inspection, regrind and process returns, ete
eal R. Pemberton, Logan Arunugam and Nabil Hassan, "
Opportunities", Management Accoun ting March 1996 pp 20 2 Daton Techno: ee
i ivity-Based Costing
Case 2:
aeAL- WORLD FOCUS
“BC for E-Retailing
activity
following ee
I E-Retailing Activities
Service Routine Customers |
pt
Ss 1
b. Flectronic Customer Order Processing 2.
3 Service | Customer Issues | 3
{Merchandise Inventory Selection and 4
Management
5. Imaging and Annotation 5.
ig, Purehasing and Receiving, : 6
Vitus Storefront Optimization o .
5 sa Rion
9 and Retention Revenue 9.
ction Maintena
romas L. Zeller, Measuring and
agement, Januar / Februar 2000, pP-
pocus
butor Identified Activit
or is a U.S. distributor of
obotics Distril
bot
activities, man shed a study to im|
activities and © i
The implementation of ABC increase
robotic product line by almost $150,
hod. This information also fat
000 and val
based costing ¢: i
nie re applied to measure and manage e-retall
u ities (2, 5, 7 and 9) are unigue to e-business
Managing E-
PI
ies and Cost Drivers for
robots for welding,
its traditional costing SY
iplement an ABI
and administration costs :
Mt Robotics’ monthly operating
lidated management
ccilitated strategic decisi
ror
ing business. Notice that frvr
Cost Drivers
E-mail and Phone Inquiries
Time (Hardware & Software Deprestai?r)
E-mail and Phone Inguities
Number of New Products
Number of Changes to Inventory Database
‘Number of Orders
(Hours dedicated Web Page
yment)
argeted Customers
affiate Links (ie iste)
oduct Categories
inistrative Area
in the Production Area
‘Based Costing”, Journa!
yr Sales and ‘Administration
materials handling, dispensing. cutting and
stem for sales ‘and administration
(C System by identifying the following major
income from sales of Its standard
rerponcerns about the previo’
product £0
fon making on which
allocation met
emphasise. _
—_ Activities ——— Cost Drivers
“Application Engineering aa Namie ot Proposals
Engineering Design Number of Bookings
Documentation ‘Number of Bookings
sales Administration Number of Customers
Marketing Number of Customers
Sales “Number of Customers
Customer Support ‘Administration _ Spare Parts
Integrator Support [Number of Integrator Customers
Transplant Support | Revenue Dollars
Finance Revenue Dollars
cand John Talbott mtetivity Based Costing I
Sance 7 David Bukovinsky, Hans Sprohee
Administrative Costs: A Case Study’
” The CPA Journal, Apri
1 2000, pp. 70-72 N
‘ost Accountins
“Advance Cost 1g (MC im),
gee’ i
a
18
Case 4;
EAL - WORLD FOCUS pes Air
“ample Resource Consumption Cost Drivers # a 7
OF Years, Hughes Aircraft allocated service UPA or becalse of
‘mployees as the primary resource consumptio® cos vost Hughes A\
opted activity-based costing to improve its cose ©
ft
erating departments Using the ,
fits simplicity. In 1991, 4p, Me,
ircraft uses the following
Sep!
Yi,
jon Bases (Resource Consump¢j,
“partments and resource consumption cost NETS gg Drivers) "Coy
Service Department (Resources)
| loyees
—— ber of Emp
tuman Resources bate of New Hires
‘Training Hours
" Square Footage
Security Saeed
en Lines Printe
ata Processing “cpu Minutes
Storage |
— ee The Standard For ABC", Manage,
Source : Jack Haedicke and David Fail, : ey
‘ccounting, February 1991, pp. 29-33. _ —
“Hughes Aireraf Sets
ILLUSTRATIONS
lustration 1: 7 di i
relating to production activi
A company produces four products ~ P, QR and S. The data relating IY ate
nder ____— schine | Direct Labos—~
“Product | Quantity of | Material | Direct Labo peer ia Can haa
Production | Cost { Unit | Hours / i ‘
a) _|___|_______—_{——;~"0.50
P 1,000 10 1 a en
Q 10,000 10 1 2.00
R 1,200 32 4 3.00
s 14,000 ieee 3 :
Production overheads are as under
1. Overheads applicable to machine oriented activity: = 1,49,700
2. Overheads relating to ordering materials 27,680
3. Set up costs 17,400
4. Administration overheads for spare parts 34,380
5, Material handling costs 30,294
The following further information have been compiled:
Product No. of Set Ups No. of Materials No. of times No. of
—___} Orders Materials handled Spare Parts
P 3 3 6. 6
Q 18 12 30 1s
R 5 3 9 3
S 24 12 36 2D
Rei
1. Select a suitable cost driver for each item of overhead expense and calculate the cost per unit 0
cost driver.
2. Using the concept of activity based costing, compute the factory cost per unit of each product
Solution :
Workings for overhead per cost driver unit
Machine hours required :
Product Quantity
1,000 Hours / Unit Total Hours
10,000 0.50 00
1,200 0.50 Poa
_ 14,000 2.00 oAt0
0 42,000_
49,900 epee aanemeaannalas diag a
erin Based Costing
, woe
oo St '
con Drivers i atement showing overheads per unit
\ Overhead Coat Driv
\ ‘ er Overhead per Unit Coat
a. | Units ’ us ae!
\jjachine related costs 1,49,700 | 49,900
areal ordering costs se ag 1 per hour
, get-up costs 17.400 50 aaa
spare parts 34,380 a6 See eel
Material handling 30.294 Bl sail coer
fa | per handlin
| Computation of factory overheads per unit
- Products nae Q R 3
oS i g z r ?
Factory Overheads | |
Machine related @ € 3 1,500, 15,000 7,200
Material ordering @ © 256 768 3,072 768
set up @ 348 1,044 6,264 1,740
spare Parts @ 955 5730 14,325 2/865
_gizag | 11,220
agge1 1
Material handling @ 374
Total_
of
11,286
1,000 10,000 _
99
11:29 |
ene
—Fotal Factory Cost per unit
‘ Material 10.00 10.00
Direct Labour 6.00 6.00 24.00 18.00
Factory Overheads i129 | 4.99 13.28 11.60
| gre | 2028 69,28 63:60 _
its two activities. It calculates activity cost rate based
Museration 2 :
he following data for
_/, MST Limited has collected t
~ on cost driver capacity :
Acti Cost Driver Capacity Cost
i) Power Kilowatt hours 50,000 Kilowatt hrs. 2,00,000
Number of inspections 10,000 inspections Z 3,00,000
the year ended on 31% March 2017, the following
ii) Quality inspection
"kes three products M, S and T. For
The company ma
consumption of cost driver was reported : ee
Product watt | :
M 10,000
s 20,000
T 15,000
activilys
Required :
1. Compute the ove
2. Calculate the cos
ed to each product from each
for each activity
heads alloca
4 of unused capacity
Solution :
Computation of Cost Driver Rates
Power cost
Total Kilowatt hours
— 2 2,00,000
50,000 Kilowatt hours
24 per Kilowatt hour
Inspection Cost
1 of inspections
0
a) Cost per Unit of Power
b) Cost per inspection Total numb:
i ve
ions
— % 30 per inspection ~
. oe’ Advance Cost Accounting (Ap ¢
. 7
h activity bey
: oduct from eae!
Overheads allocated to 6868 Pre Te product gy,
— Particulars t ; ris
i) Power cost 40,000 30,000 5
(Respective x '
{10,000 7, Nowa hours x Cost per unit of Power)
000 x 4; 9
ii) Quality eee ; * 15,000 « 4] 1,05,000 rsn00)
Numb cost .
eae of inspections x Cost per inspection) : ;
3,5 ee 2,500 x 30; 3,000 x 30] i 45,000 1,55,000
overheads allocated : | (0 .
- ity for each activity My
- capacity for each CTV"
Computation of cost of unused 08? aie
Particulars | r ;
ms a Th 0 Kwh. 10,000
i) Maxima : 50,00 060 asp
i) Capacity use 45,000 Kwh. 9,000 ing
_ {(20,000 + 20,000 + 15,000) ; (8,500 + 2,500 + 3.0001 soooxw.| 000g
™ Ove a a z4 per kwh. %30p ee
tof unused apa % 20,000 Spe
\}_Cost of unused capacity {(ii) > (iv 00a
Thee, = 50,000.
Therefore, total cost of unused capacity =& 20,000 + © 30,000 = 50,
Thustration 3 :
and D. These products are similar ang...
5 C,
ABCD Co. Ltd. produces and sells four products A,B, he puto eu ga
produced in production runs of 10 units and sold in a batch of 5 units.
products are as follows : Ta ]B | ¢ | >
oduct gg a0 a
Production (units) 100 110 120
Cost per unit :
40
Direct material @) 4 30 3%
Direct labour 5 4
Machine hours (per unit) 3
Production overheads and their cost drivers are as follows :
‘Amt.@%) Cost Drivers
Factory work expenses 22,500 Machine hours
Stores receiving costs 8100 Requisitions raised
Machine set up cost 12200 Number of production runs
Costs relating to quality control 4,600 Number of production runs
Material handling and dispatch 9,600 Number of orders executed
57,000
The number of requisitions raised on the stores was 25 for each product and number of orders execu
was 96, each order was in a batch of 5 units.
Required :
Factory cost of each product assuming that the absorption on machine hour basis; ti) Factory co
cach product assuming the absorption of overheads by using Activity-Based Costing; and it) Show &
difference between (i) and (iii) and comment,
Solution :
1. Total Machine hours = (100 x 5) + (110 x 4) + (120 x 3) + (150 x 4)
500 +440 + 360 + 600 = 1,900 hours
Total Machine Hours
757,000
1,900 hours,
730 per machine hour
2. Machine Hour Rate
3, Number of production runs = <———etal Production _
Units produced per production run
_ (100+ 110+ 120
i 0. units
Units per production run
= 48 production runs, y-
pe Based Costin
Pu
rae 1
Factory cost statement of each product
(Assuming absorption of overhen
Product — A) Product ~
z
don machine hour basis)
B | Product -C€ | Product~D Total
z z
| zg i |
ion Tq00 units; 110 units | 120 units 150 unite 480 units
ode nours per unit 5 4 3 4 16
ce per unit e e z z B
tt Material Cost | 30 40 35 45 150
7 | 30 30 40 125
rect Labour cost 25 “2 25
pire ction overhead (Note-2) 150 120 | 90
eso per machine hour | |
) i it) _——— —=
x Machine Lae Per unit) | | re aos
10 ay | 18,600 30,750
otal Factor cost | g00_| 18,600 | _="=
“ peorption of Production overhead by using Activity Based Costing
a calculation ‘of cost driver rate for each activity :
! Factory Work Expenses
a) Factory work expenses per hour Total Machine Hours
_ 22,500
~ 7,900 machine hours
p) Stores Receiving cost
) Machine set up cost
4) Cost relating to quality control
) Material handling and dispatch
Statement of Fac!
= 711.84 per machine hour
_ Stores Receiving cost
No. of Requisitions
— 8,100 _
100
_ Machine set up cost
Production Runs
81
12,200 _
ig 7254
_ Quality control cost
= “Production Runs
4,600 _
ig 7 95:83
_ Material handling and Dispatch cost
~ No of orders
= 3,900 _
96
u
100
tory cost of each product under Activity Based Costing _
Product-A | Product-B Product ~ C Product - D
Particulars ]
_ 7 (100 units) | (110 units) |__ (120 units) _ (150 units)
Cost per unit | a : -
cS Material Cost 30.00 40.00 35.00 45.00
ect Labour cost 25.00 | 30.00 .00
hroduction Overheads | = wee
Factory expenses | = 1 =59:20 47.36 35,52 47.36
pales 8x 11.84 and so on}
Stores Receiving Cost 20.25 5
(esl aeaat 18.41 16.88 13.50
; ‘0 units’ 110 units 224 80 on]
hine Set-uy
: ip Cost 25.42 25 5
Wx p 25. 2! 25.
RIT x 254.17 “ a ‘
| units > 170 units 2nd se on
taity og units
1g Comtol Cost 9.58
95 1195 63 ! 9.58 9.58 9
jounis Tames and 80 on |
[ag Handling Cost |
ec 2 20.00 20.00 20.00 20.0
OO nits | Fee LOO. _
nt’ HO units and 80 on
Toa 2, °O8t Per unit z ,
"al Factory o, 89.45 200
~ __ 18,945 30
] Advance Cost Accounting (yy ¢.
res Comy 4 }
Hii) Difference between Traditional Method and ee Based Costing '
on absorption of Production Overheads
______ Particul ~ ___] Product ~ AJ Product - BJ Product :
~_—— ———— Sl EEReOnETnnile 9 | Teg patton,
a) Per unit Factory Cost (Machine Hour Rate) 205.00 Hee 00 | 155.09, uy.
b) Per unit Factory Cost (ABC Method) | 189.45 | 190.77 172.49 py
Difference {(a) - (b)] 15,55 | (-).0,77 ©1740 20
¢} Total Factory Cost (Machine Hour Rate) 20,500 20,900 18,600 age
4) Total Factory Cost (ABC Method) 18,945 20,985 | 4!
____ Difference [(c) - (4)] 1,555, 5. 40
Illustration 4 ; & |
ABC Ltd. is following ABC. Budgeted overheads and cost driver volumes are as follows |
Cost Pool Budgeted |] Cost Driver |
Overheads ying
| z rd |
Material Procurement 11,60,000 || No. of orders po |
Material Handling 5,00,000 | | No. of movements 3
Maintenance | 19,40,000 |) Maintenance hrs
Set up 8,30,000 | | No. of setups
Quality Control 3,52,000 | | No. of Inspections
Machinery 14,40,000 || No. of Machine hrs Uy
The company has produced a batch of 5,200 components, Its material cost was 8 2,60, p95 ma
cost % 4,90,000 la,
Usage activities
Material orders 52
Material movements 36
Set ups 30
Maintenance hrs 1,380
Quality Control Inspection 56
Machine hours 3,600
Calculate
1. Cost driver rates
2. Cost of batch of. components (ICWA June 201)
Solution : :
1. Cost driver rates
11,60,000,
) Material procurement = 3200 = 52
7 5,00,000
b) Material handling = soon =368
8,30,000
c) Setup = “T040- =
19,40,000
= 19,40,000 _
d) Maintenance 16800 = 1S
3,52,000
€) Quality control = “T3800 >
14,40,000
f) Machinery = “e000 7
Computation of cost
of the Batch
z es
Direct Materials a 2,60,000
Direct Labour 4,90,00
Prime Cost 7,50,000
Add overheads —
Overheads as per ABC | 358,172
Total |
Calculation of overheads 7 a =
Material Procurement 52x $27 27,404
Material Handling 36 x 368 13,248
Set up 50x 798 39,900
Maintenance 1,380 x 115 158,700 >
get Based Costing oor
Quality Control 56 x 195 10,920
Machinery 3,600 x 30 1,08,000
3,58,172
guustration 5?
presumption that profitability can be increased by increas
DEF Bank operated for years under the
Cost analysis has revealed the following
xs but that has not been the ease. Cost
~ \ J cont TT Activity ‘Activity
_ PE __Bv bisss| 2. Capacity,
< Calculate cost of each product (CA. May 20!
Solution :
a a = 100,000"
1, Providing ATM service = 3'99,000 7 5
10,00,000
= 10,00,000
+ Computer processing = 35,90,000
8,00,000.
Issue of statements a 5,00,090 = 1.60
1 3,60,000
4, Customer Enquiries = 600,000 — 60
Computation of cost of products -
a Savings A/c Personal Loans| Credit Card
| x z z
=| 20,000 x 50, 10,0
1,80,000 x 50 90,000
80,000 | 3,00,000 x 40 1,20,0
ATM Service
Computer Processing 20,00,000 x .40 | 8,00,000 | 2,00,000 x .40
Issue of Statements 3,00,000 x 1.60 4,80,000 50,000 x 1.60, 80,000 1,50,000 x 1.60 2,40,0¢
Customer Enquiries '3,50,000 x .60 _2.10,000 90,000 x 1.60 __5,400 1,60,000 x 60 _ 96,0
Total Cost 115,830,000 4,66,0
Products 30,000 5,000 10,(
Cost per unit - _ 52.67 | 42.80 46
Mlustration 6 :
sulars perio’
The following information provides details of costs, volume & cost drivers for a partic
respect of Active Ltd, for product A, B and C.
— - ct — C Total
Production & Sales (units) 8,000
Raw material usage (units) 5| 5 11
: Dee material cost (%) | 25 20 11 12,38,00
rect Z
ct labour hours 15 2 1 88,000
Machine h 1
oe y 1 2 76,000
2 Diet labour cost @)
0. of producti 8 2 6
8 No, luction runs 3]
9, Ne ) Of deliveries, 9 u _ 8
0, | 32
1g, Sh teeipts (2 x 7)* A 3 20 a
1 Oyen, Production orders. 3 7 as 20
the.
Serup "ad costs : |
| oN
154 ore Advance Cost Accounting (Com ig
Receiving Ty ]
Packing
Engineering | | — 3,73)
— _| tL ____ 845 Oey
“The company operates a justin-time inventory policy and receives cath pamponent ce
Production run. In the past the company has allocated overheads to products on the basis of direoy ial
hours. However, the majority of overheads are related to sachine hours rather than direct labour hoy, n
Company has recently redesigned its cost system by recovering overheads using Fe volume relate 5,
machine hours and a materials handling overhead rate for recovering ovetheads of the receiving :
Both the current and the previous cost system reported low profit margins for product A which j. es
"s highest-selling product. The management accountant has recently attended a Conferency :
y-based costing, and the overhead costs forthe last period have been analyzed by the major acti
in order to compute activity based costs.
From the above information you are required to: :
a) Compute the product costs using a traditional volume-related costing system based o, te
assumption that .
') All overheads are recovered on the basis of direct labour hours (i.e. the company, hee
product costing system); .
ii) The overheads of the receiving department are recovered by a materials handling overheay I
and the remaining overheads are recovered using @ machine hour rate (i, the compa
current costing system). 7
b) Compute product costs using an activity-based costing system.
Solution :
8) Computation of the product cost using a traditional volume related costing system baseq op
assumption tha
i) All overheads are recovered on the basis of direct labour hours (i.e. the company’s prodyy
costing system);
___ Statement showing the product cost
- Product i A
Direct labour — 3)
Direct Materials | 25)
Overheads 28 |
(Refer to working note) ( i hrs. x®.21 |
Total 6 |
3@ Working Not ssxonccemamse:ssissomoms
Overheads to be charged to products
Total overheads
Total direct labour
_ ©18,48,000
88,000 his.
= 721 per direct labour hour.
ii) The overheads of the receiving department are recovered by material handling overhead rate &
the remaining overheads are recovered by using a machine hour rate (ie the company curert
costing system)
Direct labour overhead rate =
Product T _T ; _ 7
/ 4 t
Direct labour 3 —| ;
Direct Materials 3 a ;
Material handling overhead aa a :
Ke eats R25 x 35.14%) | 20 x 35.14%) 11 x35 el
Other overheads aioe 4 8
(Machine hour basis)
5 59)
(Refer to working note) (Ij rs xEIB 59) (Us. 1859) (tire. « 81859)
| : 7
Total cost. —_—__|_ >
in BO zased
Costing
i
workin
Material handling overhead rate
roe
note: Overheads to be charged to products
Receiving department overheads
Direct material cost
74,35,000
x 100 = 35.14% of direct material cost
~ 3 12,38,000
space hour overnea! ate
aup-costs
set"
working note 2 @)
pet 1?
eceivin
sf to working note 2 (ii)
packing
{Ref tow
Engineering
king note 2 (iv)
vorking note 2 (iii)
(Ref, to wo!
1, Machine overhe:
2 The cost per transaction
i) Set-up cost
Cost per setup
ii) Receiving cost
Cost per receiving order
iii) Packing cost
Cost per packing order
) Engineering
Cost per production order
Wustration 7 :
or les ple manus
i two products for the forthcoming
}) Product data
Production/sales (units)
Total Direct material cost
UM. on direct labour cost
Advanced Cost. Ak (Sem.III)
ing cost _
ad rate per hour = 76,000 hrs.
or activity for each of th
ures and sells seve!
Other overheads
Machine hours
714,13,000,,,
7 176,000
~ 18.59 per machine hour
ivity Based Costing #
B
using an Acti
A
z z 7
a 12 6
25 20 a
13.33 10 20
(3h ae) (unr eZ 10) (2he * 19)
0.35 2.50
11,0003, %1,000 «7 (zugnge 20
(*30,000- 30,000 ) (20,000 20,000 ) 3,000)
81 2.82 44.30
euptlnis E1611 35) / 21,611 x 209
(30,000 30,000 39000) (20,000 20,000 ) ( 3,000}
1.17 19.53
engi 27,812 x3 (a
(0,000) 30,000 ; (20,000 20,000 ) (~~ 8,000 )
3.73 23.31
t14sox!8) erasoxi0 27,460 x 25
(730,000 30,000 a) (0,000 20,000 ) ( 3,000 }
%7,60,000
e cost Centres is as follows :
Setup cost % 30,000) 21,000
= Number of production runs
Receiving, cost © 4.35,000)
a rs (270) eel
No. of ordet
50,000)
Packing cost & 2,9 00) ¢7812
“Number of orders (32
st (% 3,73,000)
Seer G0) ©
Engineering cost
‘No. of producti
stimated data
products, two of which ate Alpha and Beta. E
ral
period is as follows:
Alpha Beta Other
products
5,000 10,000 40,000
7000 7000 7000
80 300 2,020
40, 100 660 156
Requiremen;
a Advance Cost Accouny
a2’ "MC
uu)
st is © 1,500,000 of which 40 percent is related to the ag is
xl to the control and use of dig, or
St labo
iti) and the remainder is 1 and
MTent practice for Apollo ple to absorb the two types of variable overhe, co
Using an Overall company-wide percentage based on either direct material Cost ap k
SOS appropriate,
Apollo are consi
Telated oy,
iv)
dering the use of activity-based costing. The cost drivers for Materig
etheads have been identified as follows
Alpha Beta My
Di
rae Material related overheads-cost driver is
igh unit 4
SAC of material weight of materia
Niamh Pott eated overheads cost driver is \
YD Market tbour operations (labour operatios/unit) 6
“I lnvestigation indicates that markets prices for Alpha and Beta of
've the estimated sales shown in (i) above.
TesPectively will achie
Apolo ple require a minimum estimated contbuton sales rato of 40 perce
or sale of any product.
With the production
its
vi
Band 9s 2
Dt before
Proc
ty,
Product units as follows:
i) Using the existing absorption rates as detailed above,
ii) _ Using an activity-based costing approach.
Using the information in (a) prepare an analysis that wil help A
and B should remain in production,
Your answer should include
Presentation to management,
©) Explain how Apollo could make use of target costing in conjunction with activity-based
with respect to Alpha and Beta, ey
a) Prepare estimated unit product costs for Alpha and beta where the variable Overhead ig ck
ee
b)
pollo determine Wheth
lt bog, 4
relevant calculations and discussion and be Prepared in a form, Suita
lie
Solution :
a)
i) Unit costs using traditional absorption costing :
Material related overhead cost (40% of & 15,00,000) = % 600,000
Overhead absorption rate {(% 600,000 + & 2,400,000) x 100) =25% of direct material cost
Labour related overhead cost (60% of & 15,00,000) = 900,000
Overhead absorption rate {(% 900,000 + % 800,000) x 100} = 112.5% of direct t labour cost
oe Alpha | Beta
Direct Materials 16 =
Direct labour 8 W
Prime cost 24 a
Material related overhead (25%) 4 15
Labour related overheads (112.5%) 9 11.25
Total variable costs
iii) Unit costs based on activity-based costing
_ | Alpha | Beta Other
: : — | Alpha | a :
Production units 5,000 10.000 ‘oro
Weight of direct material (kg) 4 ie
Total weight of material (ke) 20,000 10,000 _ 600
vat 600,000 :
Mat, Related overhead/ke, 55,5505 10,000 T0000 * 657 ke
____ 1
Alpha Beta _ or
— 00
Production units 8.000 |” 10,000 .
Labour operations/unit so.00% | 10,000 | 8%!
Total operations _ hai - =
% 900,000 a a
Lab. Related overhead/op 39999 10,000 + 80,000 = 7-5 per operati
) roe
Alpha Ba
e ,
4 Mat » o
one jabout i 1 :
pir cost A
pain OP yerhead en 40
ter ated overheads [ae : oe
pou" 5 5
at able costs 95.68 54.17
0 ] Alpha Beta
| Traditional | ABC Traditional == ABC
. [ o« | z
| 3 | 30 30
10 10
| 4 7.50 6.67
vera ated overheads 9 11.25 7.50
iar PR costs 37 58.75 54.17
stot giable
¥ 75.00 | 95.00 95.00
38 20.68) 5
51% (28)% __
i per cent. If prod =
—— eg minimum C/S ratio of 40 per cent. If product costs are determined using the
f Alpha (CS ratio of 51 per cent)
io
=o ple require & o ‘
x methods “apollo would decide to proceed with the production ©
* peta which has C/S just below the required 40 per Cent
ABC is used the decision will be reversed. Alpha will be rejected on the basis of a negative C/S ratio
F owill proceed with Beta, which has a C/S ratio of 43 per cent.
ABC provides @ more accurate cost of products unlike the traditional methods used, which is a broad-
f costs. ABC attempts to reflect the true consumption of resources.
‘with ABC will enable Apollo to find ways of reducing the
Jue analysis and value
ed avera®
a e use of target costing
2 sof Alpha to arrive at 8 target cost. Cost reduction methods such as val
4 40 per cent C/S
this, ‘Though Beta just meets the requir
cic ould decide to increase margins further by carrying out a similar exercise on Beta.
Target costing should also be used to identify selling prices for specific markets.
ods and equipment for
using broadly the same production meth
-based costing (ABC)
akes three main products,
| product costing system 1s used at present, although an activity
<, Details of he thee produts for atypical peiog are:
] Hours per unit Material Volume
| Labour | Machine units
|_hours,
tion 8:
Trimake Ltd m
ah A conventional
saem is being consider’
per unit
z
Costs relating to inspection 30
100
Total production overhead Ny
Advance Cost Accounting M Cony
. wae ,
. of fine for the period as 4 y y
c ctivity Volumes are associated with the product line for the period 0h
The following total activit eT | iovemenia | Bee
Set-up | of materials. inspaea!
odui | 75 12 mn
Product X se)
Product Y 115 a1
mee 670 | 120 5,
bh)
c) Comment on the r
Solution :
8) Conventional Cost per unit :
late the cost per unit for each product using ABC principles
ons for any differences in the costs in your answers to (a) and (b)
] x | Y
ee —_
Materials 20 12
Labour - 2!
Direct cost 23 21
Production overheads & 28/hour) 42 | 28
Total production cost per unit | 65 oe
b) ABC cost per unit
Analysis of total overheads and cost per unit of activity
% Total Level of | Gog
| overheads | activity unite
: | Activity
- i
Setape 35 229,075 670) 34]
Machining 20 130,900) 23,375 | "590
Materials movement 15 98,175 | 120| 818.13
Inspection 30 196,350 | 1,000 | 196.35
| Too 654,500" |
Working
Total overheads
] Production] Machine Total Rate | Total
Units hours | Machine Per overheads
runit | hours Hour
| | per | |
X | 750 | 15 | 1,125 28 % 31,500
Y age taco) |e ito 4 1,250 %28 | %35,009
Z 7,000 | 3.0 21,000; 28
| | 23,375 |
Total overheads by products and per unit
] x Y Zz
Activity | Cost | Activity [cost | Activity Cost Total
Set-ups 75| 25,643 115 | 39,319 480] 164,113 229075
Machining | 1,125) 6,300) 1,250) 7,000 | 21,000 117,600 | 130,900
Mat. Movement 12) 9,817 | 21) 17,181 87) 71,177) 98,175
Inspection | 150/ 29,453 180) 35,343} 670 | 131,554 | 196,
Total overheads 71,213 | 484.444
No. of units 750 | | "7,000
Overhead cost per unit | | 394.95 | | | % 69.21
Total cost per unit
Tx : 7
7 | z | z |
rect cost
23.00 00
Overhead Costs | 94.95 | 3 07
Total production cost 117.95 100.07 |
Per unit j . #08 |
| roo
‘ . Y
e | z z
,
42.00 M00 /
| - stu
f 94.95 79.07 7
neds sting) | 4a
or ( activi) exiity-based costing results in the overhead costs of X and Y increasing wh,
0 easing while the
anes ect
7 dec! fairer unit cost that better reflects the efforts required
red in the
rases.
a ¢ ABC provides @
8 i ferent products. :
of with Z, a major product line which takes longer to produce but once producti
0 ion
¢°
rat : : ’
gn be oe minister unlike X ‘and Y which are minor products but still requite a fair amount of
le 0
lable BOW pg :
aye HME er 1000 units et-ups Material Insj
cctivities PS ____ Movement pections
100, 16 =o
| 92 | 7 Gd
144
. ela 96
»ments and inspections per 1,000 units than X or Y.
per unit for these three activities has fallen.
to three times greater than X and Y.
isl as fewer Set-UPS: ‘material mover
ste product Z has :
ce product 7’s overhead cost
1 8 pein overed COP units still two
‘
(ABC) organized by ICAI you decide to
ctivity-based costing (
‘ducts currently made and sold by your
tion 9 *
ded a ICAI course om a
ples of ABC to the four pro.
paving ENC the princi
at by applying the Ph i i below fe iod :
sg gil ofthe four products and relevant information are given below for one period’:
Product [ti | K L
_— 120 100 | 80, 120
| papain us : z| |.
| st per unit ) 50 30 60
pgect ates | 28 21 14 21
4 3 2| 3
-oduced in production runs of 20 units are sold in
jabour:
| wee nous (per uni) _ oa
pe four products are similar and are usually pr
s of 10 units.
t and the total of the
sorbed by using a machine hour rate,
head is currently al
The production over
suo ovetead forthe period has been analyzed as follows : —
<= = z
Vachine department
(Rent, business rates, depreciation and supervision) 10,430
Setup costs 3,250
Sure receiving 3,600
2,100
4,620
‘nspection Quality control
-eterals handling and dispatch
You have ascertained that the “cost drivers’ t0 be used are as listed below for the overhead costs
ion
Cost zi — “Cost Deriver -
Number of production runs
Requisitions raised
Number of production runs
Set-up costs,
Store receiving
fs¥ection/ Quality control
‘aerials handling and dispatch order
aecuted
The number of requis — | —— = _ e
ted was mee requisition raised on the stores was 20 for each product and the number of orders
eee co being for a batch of 10 of a product, you are required.
total costs for each product if all overhead costs are absorbed in a machine hour
sis,
4)
caleulat ;
fe the total costs for each product, using activity-based costing; oN
160 e's Advance Cost Accounting (4 Cy «
ie
mn
©) {0 calculate and fist the unit product costs from your figures in (a) and (b) above 4
difference and to comment briefly on any conclusions which may be drawn Which ° Sy '
pricing and profit implications. Ul is
Solution :
a) Total Machine Hours = (120 «4 hrs, } + (100 x 3 hrs.) + (80 x 2 hrs.) + (120 3 hr
1300 hrs 4
Machine hour overhead rate = £10430 & 5,250 1 8 3,600 + 82,100 + 8 4,620
1300 hours
- % 20 per machine Hour
Product lees K
ave ze | z L
Direct material -
40° 50, 7 x
Direct labour 23| 2 a 4
Overhead at & 20 per machine hour 80 60 a
; 148 31 &
Units of output | 120 io ita
Total cost _ 217,760) 13,100 lay
—b) Coss __ %
Cost driver ire
7 | Transactions a Per
Machine department | 10.430) Machine hours at
Set-up costs | 5,250 Production rans
Stores receiving 3,600 Requisitions raised 80 (4 x 29)
Inspection /quality control 2,100 Production runs 21
Materials handling 4,620 Number of orders
executed
Note:
Number of production runs = Total output (420 units) + 20 unit per set-up.
Number of orders executed = Total output (420 units) + 10 units per order.
The total cost for each product are computed by multiplying the cost driver rate per unit by the quant
of the cost driver consumed by each product.
1 J Ko] tL
Prime Costs 8,160 68x 120) 7,100 3,520. mp
Set-up 1,800 @ 250% 6) 1,250 @ 2505) _ 1,000 1300
Stores/receiving 900 @ 45 x 20) 900 900
Inspection /quality 600 100 x 6) 500 | 400
Handling dispatch 1,320 @110x12) | 1100 @110x 10), 880
Machine dept. cost 3,851 _2,407 1,284
Total Costs 16,331 13,257 7,984
Note:
3A = 120 units x 4 hrs x % 8.02; B= 100 units x 3 hrs x ¥ 8.02.
©) Cost per unit
Costs from (a) | 148.00 | 131.00 84.00 | 141.00
Cost from (b) 136.00 132.57 99.80 141.07
(11.91) 57 15.80 0.07
Product | is over-costed with the traditional system. Production J and K are under costed and sim
costs are reported with product L. It is claimed that ABC more accurately measures resources consumed
products (see ‘Errors arising from relying on misleading product costs’ in Chapter 10). Where co:
pricing is used, the transfer to an ABC system will result in different product prices. If activity-based
are used for stock valuations then stock valuation and reported profits will differ.
Illustration 10 :
The following budgeted information relates to Brunt forthe forthcoming period
Products
XY y2r ABW
"Sales and production (unit) 50 40
z z
Selling price (per unit) 45 95
ime cost (per unit) 32 84 oP sed Costing
‘ i
ie
/ogpine department
a Migcin® ours per unit)
(
sembly
Arrect labour
or pead allocated and
covered in product co:
partment at © 1.20 per
department
r hours per unit)
apportioned
to
10
yer? Machine de}
alin that the above overhe
follows:
‘achine hour, Assembly depa
ds could be reanalyzed in
oo
Hours Hours
2 ,
7 4 2
production departments (including service cont centre costs)
artment at % 0.825 per direct labour
to ‘cost pools’ as follows
] Cost driver Quantity for
the period
%.000
|
|
vices | 357. Machine hours 420,000
gine 5
jyootthy services 318 | Direct labour hours 530,000
4350 Costs 26 | Set-up 520
get UP ocessing 156 |Customer order 32,000
ordet F ing | 34 || Suppliers’s orders 11,200
pusens dL
‘you have aso been provided wit the following T= -
e and prese}
ventional
ent profit statements using;
absorption costing;
poe ae
120
| 8,000 ,
| 81900 498° 4.200.
sed costing +
event a fairer valuation of the product cost
(ii) Activity ~ ba
considered to pr
0
Comment on Why activity-based costing ©
per unit
ion ¢
i) Conventional Absorption Costing Profit Statement 2
a xv yar ABW
iy Sales volume (000 units) 50
) Selling pricing: per unit | 45
3) e cost per unit 32
3) Contribution Per unit 13
3) Total contri Is 7000 is (1 x4) 650
jj Machine department overheads 120
7) Assembly department overheads 2
Profits (@ 0005)
Total profit z % 388,750 _ oe a Pa 7 7 Z
Note
axyl= 50,000 x2 brs: x1 20 ; YZT = 40,000 shrs. x © 1.20 ABW 30,000 x 4 x 1.20
bxy1= 50,000 x 7 hrs. x%° 25 ; Y2T = 40,0009 hrs, x £0,825 ABW 30,000 2x 825
__ ii) Cost pools + :
| Machine ‘Assembly Set-up Order Purchasing
= service service processing
+000 357 318 26 156 34
Cost drivers 420,000 530,000 520 32,000 11,200
—lFfachine | Direct labour Set-ups Customer | suppliers
hours hours order orders
———z0.85 | 70.60 750 per | © 4.875 per ¢ 7.50 per
pirect labour Setup | customer suppliers
machine | DUS hour order | ord"
hour Advance Cost Account)
ie ore "8M Coy ty
ABC Profit Statement :
~ | XY V2 eer | |
(%000) | _ (® 000) |
Total contribution 60 o |
Factory overheads; 85 170 |
Machine department at % 0.85 per hour 210 72
Assembly at € 0.60 per hour 6 10
Set-up costs at & 50 per set-up | 39 39
Order processing at & 4.875 per order 30
Purchasing at € 7.50 per order 119
Profit (Loss)
___ Total profit = € 389,000 _
Mlustration 11:
XYZ ple, Manufactures four products, namely A, B, C and D, using the same plant ang Peg
h
following information relates to a production period : re
7 jrect labour | Machine time Lap—~
Product, Volume Material cost | Direct lab oars
permit | _perunit_|_perumit "pg a
a5 ¥% hour | “hour ae
3 5,000 5 | hour Y hour 8
c “600 rie 2hour =| hour At
D 7,000 uu7 Vhour | 1% hour :
> 9
Teal production overhead recorded by the cost accounting system is analysed under te
headings : - ty
Factory overhead applied to machine-oriented activity is € 37,424 /
Set-up costs are & 4,355. The cost of ordering materials is @ 1920. Handling materials y y
Administration for spare parts- & 8600. si
These overhead costs are absorbed by products on a machine hour rate of € 4.80 per hour, iin
over! .ad cost per product of.
= 7120 B= 1.20 C= 74.80 D=2%7.20
ywever, investigation into the production overhead activities for the period reveals the {alloy
totals;
1 oduct | Number ofset-up | Number of | Number of time Nanbeg
material orders | materials was spare pars
handled
+ 1 il | 2 2
F 6 4 10 5
( 2 1 3 1
D 8 4 pla) 4
You are required :
i) t compare an overhead cost per product using activity-based costing tracing overheais
production units by means of cost drivers.
ii) To comment briefly on the differences disclosed between overheads traced by the present sex
and those traced by Activity-Based Costing.
Solution :
Machine-related costs
Machine hours for the period :
A= 500x% = 10,500
B= 5000x% = 1,250
C= 600%% = 600
D=7000x% = 10,500
12,475
Machine hours rate ~ ® 3 pet hour (@ 37424/12,475 hrs.)
Set-up related costs. Cost per set-up = % 256.18 (@ 4355 + 17)
Set-up cost per unit of output
Product A (1 x¥256.18)/500 = x95)
B (6 x % 256.18) 5000 = 931 Pa
er Based =.
C (6 x % 256.18) 600
; D (8 x 7256.18) 7000
Materials ordering related costs, Cost
Materials ordering cost per unit of a ie
product A(1 x2 192)/ 500 7
B(4x% 192) 5000
C(1 x 2192) 600
D (4x %192)/ 7000
aterials handling rel: 5
M g related costs. Cost materials handling = © 7,580 + 27 orders
Materials handling cost per unit of output
Product A (2 x & 280.74)/ S00 "
B (10 x % 280.74)/ 5000
CG x % 280.74) 600
D (12 x % 280.74)/ 7000
Spare parts
Cost per part =
Product
% 8,600 + 12 = % 716.67.
A (2x %716.67)/ 500
B (5 x %716.67)/ 5000
C (1 x % 716.67) 600
D (4 x%716.67)/ 7000
ead cost per unit of output
Product
Overhs
— _—S——
head cost
ove
Machine overheads
set-UPS
Materials ordering
Materials handling
spare parts
present system
Difference
reo
TORS
70.29
order =® 1920 + 10 orders ~ © 192 per order
~ PO38
F015
70.32
TOA
2 280.74
z112
= 0.56
T1.10
70.48
‘Administration of spare parts cost per unit of output
%2.87
= 20.72
Z119
= 041
——e 7 2 :
a z is
| 4.50
| 0.29
| o.11
0.48
a o.41
5 5.79
4.80 7.20
_+ng96 | =} a
J thus the present volume-based recov ry shows a large
onsumers
©
Production D i:
share of overheads
overheads according
result proper pricing ©:
to activities consumptio
f the product can be made.
5 the low volume product, an
for the product. In contract,
n and traces
zes that product De
the ABC system recognl
overhead to this product, as 2
to low amount of
Ilustration 12: (Traditional ‘V/s ABC)
‘A company manufacturing (WO products furnishes the following data for a year; -
Products ‘Annual output eel machine | Tks! Nahe Total Number
(units) hours of purchase of set-ups
| _ _orders
A 5,000 20,000 160 20
_ 8B 0 120,000 _. 384 44
The annual overheads are as follows
z
Volume related activity costs 5,50,000
Set-up related costs 8,20,000
6,18,000
Purchase related costs
1 You are required to cal
Traditional method of cl
Activity-based costing method.
Solution :
Working :
culate the
harging overheads;
4) Volume related activity costs
Set-up related costs
Purchase related costs
Total
overhead charge per unit of ¢
ach product A and B, based on
5,50,000
8,20,000
6,18,000
19,88,000 . Advance Cost Accountin
164 wee 2M ay
b) Total machine hours = 20,000 + 1,20,000 ~ 1,40,000 hours ty
19,88,000_ : 4
©) Machine Hour Rate = 745990 hours © 14.20 per hour
1 Traditional Method of Absorption (or recovery) of overh,
~~ Particulars Product — 4.
i) Annual output 5,000 unity
ii) Total Machine Hours 20,000 hours
iit) Machine Hour Rate [See Note (c} above] 214.20 per hor
iv) Overheads apportioned to products {(ii) x (iii) | 2 2,84,000
¥)_ Overhead charge per unit of product liv) + i) z 56, 80
2. Computation of Cost Driver Rate
8) Specific Machine Hour Rate (for volume related ac
tivity)
~ Annual volume related activity eost
Total machine hours
2 5,50,000
740,000 hours = © 3-9286 pee hour
— Annual set-up related cost
b) Cost et 7
) Cost per set up Total number of set-ups
%8,20,000 |
“Q0+ 4a), = ©12,812.50 per set up |
|
©) Cost per Purchase order = —Attual purchase related cost
Total number of purchase order
_ _%6,18,000 |
Ta |
(160 + 384) orders
= © 1,136.03 per order |
Activity-Based Costing method of charging overh,
Particulars ||...
i) Overheads related to volume based activities
(Respective machine hours x Specific machine hour rate)
[20,000 x 3.9286; 1,20,00 x 3.9286]
ii) Overheads related to set-ups
(Number of set-ups x Cost per set -up)
[20 x 12,812.50; 44 x 12,812.50]
iii) Overheads related to purchases
(Number of orders x Cost per order)
(160 x 1,136.03; 384 x 1,136.03] 7
iv) Total overheads charges (G) + Gi) + (iy) _ 5,16,587
y) Annual output
| Spe | atin
a 5,000 units 60,969
¥i) Overheads charge per unit iv) +v)] 103.39
Therefore, per unit overhead
charge is much higher for Product-A under
because of its use of more activities,
Activity. Based (),
Illustration 13
Family Store wants information about t
produce and Packaged food. Family Store pr
line :
he profitability of individual product lines: Sof drs fs
‘vides the following data for the year 2016-17 fr eu
Particulars Soft Fresh Packaged
drinks | produce fou
; "| 87,938,500 21,00,600 m8
%6,00,000 %15,00,000 400
Revenues
Cost of goods sold
Cost of bottles returned
712,000
Number of purchase orders placed 360
Number of deliveries received 300
Number of shelf -stocking time 540
Items sold
1,26,000 | _11,04,000 y OO
evr Based Costing
: 6; 165
the follo -
- Description of mation forthe year 2002-03
a ctivity Total | Cost-allocation Base
potest — __ Cost
ie ottles | 12,000 | Direct tracing to soft drink
ordel | | line
peliverY Physical delivery “ Purchases 1,56,000 | 1,560,purchase orders
ghelf-stocking Stocking of goods g. Pt Of Boods 2,52,000 | 3,150 deliveries
shelves an . Son stores 172,800 | 8,640 hours of shelf
stomer SUPPOTt Assistance pro. ons Testocking | stocking time
cu Providi é
lt including checkeout tocustomers | 3,07,200 15,36,000 items sold
Required
i) Family Store current}
lines on the basis of cut oe’ SUPPOM costs (all costs other than cost of goods sold) to prod
operating income as a pongo eos SOM of each product line. Calculate the operating income an
i) TF Family Store ally CMe of revenue ofeach product line on this basis
using an Activity Based Coo eeor 605 (all costs other than cost of goods sold) t0 product lines
Sin : an
percentage of revenue for each et caleba the operating income and operating inco”
iii) Comment on your answer in requirements (i) and Gi).
Solution :
Computation of total support cost (all costs other than cost of goods sold) =
ee Activity ‘Support Cost @)
Bottles returned oe 12,000
Ordering 1,56,000
Delivery 2,52,000
Shelf-stocking 1,72,800
Customer support 3,07,200
Total Support | 9,00,000
Total support cost 100
2. Support cost as a % of cost of Goods sold = 75r cost of Goods sold *
_ 9,00,000 aa
= 00,000 + 15,00,000 + 9,00,000
= 30%
ity cost driver. _
Computation of overhead charge for each activi 7
yo ie No. of Activities Cost driver Rate =
Activity Total cost
I i 1 IV (il + 11)
a Ordering 1,56,000 | 1,560 orders 100 per order
8) Delivery 252,000 3,150 Deliveries 80 per Delivery
| Shelf stocking 1,72,800 | 8,640 hrs of stocking| 20 per hour
4) Customer support 3,107,200 __15,36,000_ items sold _.20 per item sold
4. Statement of operating Income a _—
a ~ Soft Fresh Packaged
Drinks Produce | Foods Total
z z z z
Revenue - 7,93,500 21,00,600 12,09,900 ~ 41,04,000
Ost of Goods Sold | 6,00,000 | — 15,00,000 9,00,000 30°00,000
“upport cost (30% of COGS) 1,80,000 4,50,000 2,70,000 9,00,000
5 7,80,000 19,50,000 | 11,70,000 39,00,000
erating Income 13,500 1,50,600 39,900 204,000
‘of oy 1.70% 7.17% 13.30" yor
erating Income 166
22's Advance Cost Accounting M Cony
‘Sem
Statement of operating Income 4,
— (Support cost allocated #!
aaa per ABC) Packaged
Pact oon Fresh ia %
Drinks | produce a a]
_ L
Revenue | eC 99 | 12,09,900 2
7,93,500 21,07 50 “9'00,000 41,04
ae a Goods Sold 2D 15,00,000 9,00,000 39) ont
of Bottle Returned "12,000 - > lai
Ordering cos v0 gao00 36,000 1p
jo of orders x Rat ae | hy,
Delivery Cost onde 24,000 1,75,200 eat 2.52.04,
(No. of deliveries x R . :
ahead 54,0
per delivery) 10,800 | 1,08,000 ,000 172,54,
a Stocking Cost | ‘
irs. of stocking x Rate per hour) | 61,200
Customer Support Cost 25,200 2,20,800 ee
(Items sold x Rate per item) | spen08 555000 11;04,000
80 12,600 1,05,900
Total cost
Operating Income 85,500 60% 8.75%
% of Operating Income. 10,78% = a
——_——— van the traditional system
Comments : ABC provides more reliable information th
under :
Illustration 14 iis are as
___ Pessimistic Ltd. manufactures three types of brands. The cost details _
Coco [Strawberry Lim,
z z Se
0
30 40
TT
Direct Materials per Unit
Direct Labour @ 10 per hour | 30 40 50
Production overheads per unit —F10 120 —50
Total Cost | Joo00 | 20,000 =
Production (Units) 20,000 | 30,00)
The company was absorbing overheads on the basis of direct labour hours.
ed as a Management Accountant, 1,
completed his CMA has been appointet.
drivers and cost pools as follows:
Mr. Dhairya who has ;
suggested that the company should introduce ‘ABC. He identified cost
Activity Cost Driver Cost
| z
|
1. __ Stores Receiving Requisitions 2,96,000
2. _| Inspection Production Runs 8,94,000 |
| 3._| Dispatch Orders executed 2,10,000
[4,_| Machine set up No. of set ups 12,00,000
OO T—Geco [Strawberry] Limes
ee a z z
No of set ups ] 360 390
No of orders | 180 270
rodeo Runs 750 1,050
Purchase requisitions 300 "350
4590
_ Compute cost of the three products t based on activity :
Solution :
Rate per cost driver
: 12,00,000
Setup = “T599_~ 1,000
2,100,000
op — 2lt,000
Per order 750
ver production Run = SPE? p99
- ‘ 2,96,000
Per Requisition = “1250. 236.8 _ posed COSINE
ve ee roo
eee Coco
z goterial ——
‘pour 5,00,000
ona ost a 3,00,000,
shen 8,00,000
fa org ectivin @ 236.8
0 on @ ae 71,040
ch @ 2! 2,23,500
vate setup @ 1,000 50,400
yn 3,60,000
aon _15,04,940
tion 15
a toys Ltd. produces two products Bolley
Strawberry
2 (10,000) | % (20,000) _% (30,000)
Limea
8,00,000 12,00,000
8,00,000
15,00,000
16,00,000 27,909,000
3,12,900
3,90,000
24,85,060
ant Holley. Both the products are produced with !
on :
1,06,560
75,600
si ry and similar process. Relevant informat
production (Units) Boley Hoy
Machine hrs per unit 3,000 15,000
pirect Lab hrs per Unit 5 2
No. of purchase orders iS ie
Material cost per unit z a 0
Labour hour rate per unit 220 0
No. of setups 30 90
Cost of activities :
z
Volume related 1,80,000
Purchase related 150,000
Set up related 3,90,000
Overheads are based on direct labour hours,
Prepare cost statement under Traditional method and ABC.
Solution :
Total Labour hours
Bolley 3,000 x 4 12,000
Holley 15,000 x 4 60,000
rhe
_ Overheads _ 7,20,000_
ate Tabour hours ~ 72,000 ~ 19
eS Cost Statement (Traditional) _ _
_ Bolley [3,000 Units’ Holley 15,000 units
Pu. | Total PU.” Total
z z z z
Dreet Materials 10 30,000 10—*1,50,000
dveet Labour 20 60,000 20
rime Cost 30 90,000 30
Inetheads 4 x 10 40 1,20,000 40 6,00,
Oy 210,000 ZQ 10,50,
Abe
Related Volume 3,000 + 15,000 = 18,000 units
Purchase related orders = 60 + 90 = 150
No. of set ups = 30 + 90 = 120
Rates
Volume related = 1s 008 = 10
Purchase related = 150,000 = 1,000
. OO \
Avance Cost ACCOMM Cy
i
ror
twlated = 3:90.000_ 5 259
120 oo ——
—_ Bolley 9,000 Units) Holley 15,
- , ,
~ Pu. | 7 :
ic
30,000
60,000
90,000
Materials 20
Labour 30
Prime Cost
Overheds 10 30,000
Vohume Related | |
Perohase Related | 20 | 60,000
Beley 1,000 « 60 | s|
uy 1,000 x 90 | ty,
|
Set up Balnted
32.50 97,500
10 . EXERCISES
10.1 Theory Questions :
What is ABC? What is the difference between ABC and Traditional Costing?
> Whar do you mean by Cost Drivers? Give examples of Cost Drivers.
5 Explain the steps in ABC.
10.2 Objective Questions :
1 Multiple choice questions. Select the right answer :
ABC isa
2) Method of costing
+7 Method of allocation
¢) Technique of costing
4) All of the above
2 An activity which generates cost is a
as Cost driver
5) Cost pool
¢) Cost unit
4) Cost centre
The customer order processing activity has cost driver
a) Order value
b) Order source
c) Inspection plus
ay a&bonly
4 ABC stands for
ay Activity based costing
b) ABC Analysis
©) Asset Based Control
4) Allof the above
Documentation activity has cost driver
45 No. of bookings
b) No. of spare parts
©) No. of proposals
4) Allofthe above
6 ABC based costing
a) Focuses on activities performed to
: Produce product
hy Classifies activities into A.B\C cate
*gories Caer
yO
vee
jeouins
po seal fo" controlling cout
oF None af the above
0 ies 10
anit aseertait the factors that cause activity
a” sawcorta8 cost of such activity
») ascertaills relationship between activities and products produced
°” altof the above
a steps 0 ABC include
; rhe dentification of main activities
jdentification of factors which determine the cost of wctivity
Collection of cost af each activity
©) Ayr of the above
A st driver is an
a AS cetivity that generates cost
Activity that collects cost
‘activity that assigns cost
at of the above
rs may be
e
d)
Cost drivs
Structural
Organisational
Activity
d) All of the above
41, No. of purchase orders is an
a) Activity cost driver b)
¢) Structural cost driver 4)
No of inspections is an
ay Activity cost driver
b) Organisational
¢) Structural cost driver
4) Allof the above
13. ABC provides information which is
b)
12,
driver
a) Better
b) More accurate
¢) More reliable
4) Allof the above
4, Cost driver for customer order processing is
a) Order value
b)_ Inspection plans
c) Engineering changes
d) Training requirements
15, Cost driver for inspection activity is
a” Inspection plans
b) No of orders
©) Order value
d) No of machine changes
16. Cost driver for production activities is
AS” Flow of product from assembly
b) Activity level
c) Inspection plans
d) No of orders
'7. Cost driver for personnel activities is
Recruitment activity
b) Capital expenditure
Organisational cost driv
All of the above 170
Advance Cost Accounting (yg Coy
os's
©) Volume of activity
4) No of systems operational
Cost driver for financial accounting activity #8
a) Noof Accounting transations:
b) No of times accounts produced
©) Volume of activity
4 Allof the above
Under ABC cost reduction is achieved by
a) Reduction of setup time
») Elimination of wasteful activities
©) Pick lowest cost alternatives
4) All ofthe above :
20. Under traditional costing cost reduction is achieved by
3) Reducing direct labour
b) Use common components
©) Pick cheapest alternatives
4) Allofthe above
21. ABC cannot be applied where hos :
Distinction a be made for cost attached to various activities or functions
b) Distinction can be made for cost attached to various activities or functions
©) Activities are identifiable
4) None of the above
22. Implementation of ABC system is possible when
a) Activities are identifiable
) Overheads are related to activities
©) _ Co-operation between operating units and service functions
A) Allofthe above.
. Following is not a facility level activity
a) Advertising campaigns
b)_ Property taxes
©) Insurance
4) ordering of materials
24. Machine set up is a
a) Batch level activity
b) Unit level activity
©) Product level activity
4) None of the above
25. Inspection is the
4) Unit level activity
b) Product level activity
=
©) Facility level activity
4) None of the above
26. Testing of product is a
4) Bateh level activity
b) Unit level activity
©) Facility level
tivity
d) Product line activity
Following is not a product line activity
a) Product designing
b) Engineering changes
©) Ordering of material
d) None of the above sone vow
gccurily 84
“nity level activity
ii
: jyct level activity
rod be
» a it level activity
A) evel activity
ch |
’ pa machines is 0
1 nil Jevel activity
a patch level activity
OY roduct level activity
one of the above
“designing isa
pro eel line activity
a patch level activity
racility tevel activity
‘Allof the above
: aiding depreciation is a
Facility level activity
3) product level activity
unit level activity
atch level activity
ash b), 2 ie G ~ d), @~ a), (5 - a){(6 — a), (7 —d), (8 — d), (9 — a), (10 - 9),
(aM, (13 — a), (14 7 a), (15 ~ a), {16 ~a), (17 £2), (18d), (19 — d), (20 — a),A21 a) 2
4-8 25— a)/ (26 —a), (27-c), (28 ~ a), (29 b), (30 —a), (31 -a)]
sate wetter following statements are true or false :
ABC is @ traditional system of cost allocation.
\- gc involves identification of activities and cost associated with it
* Cost driver is an activity that generates cost.
"Cost driver may be structural.
[ABC provides more accurate information.
3
4
{Inspection plan is a cost driver for customer order processing :
1.
9.
°
11a)
d), (23
* No of orders is a cost driver for inspection activity er
Recruitment activity is a cost driver for personnel activity.
Volume of activity is a cost driver for financial accounting activity.
Reduction of set up time reduces cost.
Reduction of direct labour reduces cost.
[ans.: True: 1, 2,3,4,5,8,9, 10,11 False: 6,7]
rillin the blanks with proper words
}, ABC focuses on _
3, The activity that generates cost is a
3. Cost driver may be
4
5
6.
No of purchase orders is a
5, ABC provides _ information.
| Cost driver for inspection activity is :
is a cost driver for personnel activities.
&. Reduction of setup time reduces __
9, Reduction in __ labour reduces cost.
10, Implementation of ABC system is possible when activities are
11. Production scheduling is a cost _
Material handling is a cost___
13. For purchasing cost, no of purchase order is a _
Direct costs do not need -
15. ABC uses___cost drivers
“MCom~ Advanced Cost. Ae (SemIII) on
Advance Cost Accounting (yy, Copy)
ors ie
a : ™.
ional, 4. Cost driver, 5. Reliable, iy
(Aus: I Activities, 2, Cost driver, 3. esata’ identifiable, 11. Pool, 12: 7M, \
plans, 7. Recruitment Activity, 8. Cost, 9. Direct, hy ch
duaver, LY. Cost drivers, 15, Multiple] ‘
y
v ; i T No of ATM transacti
Mew the following columns a) | Noof ATM transactions
eos oe “ cost Yb) | No of computer transactions ~
2 _ Purchasing cost
~__; Purchas c Cost pool
+ ATMS so) i
1a eign
+ —Smputer pre ) | Cost driver .
st Rae mati storage ee Stock handling i
Prialiwae cess ceeeregeeereneecal g) | Direct cost \
___No of inspections ph) | No of purchase orders “|
Bese date i) _| Indirect cost \
ue = )i)_[No of production runs J
h,3~a,4-b,5-c,6-d,7-e] 2
Me
Short questions
What is Activity Based Costing?
2 What is cost pool?
3. What is cost driver?
What do you mean by facility level activity?
What is batch level activity?
VL Write short note on ;
Cost Driver
> Classification of Activities,
3 Cost pool
10.3 Practical Problem :
Overhead recovery rate using ABC and finding out cost of production :
Tops Ltd. assemble two products from bought in components A and B. Details of maiufactur ae -
- B
"Output in units 10,000’ 75 gap
Component Numbers i; 4
Component Cost ®
4.50 3.60
Number of Production Runs 200 50
Machine Hours per 100 units 2.6 53
items packed in cartons of (Units) 10 50
Overhead Costs are budgeted at :
Component Purchasing and Handling ®) 14,000
Production Control 18,000
Machine Set-up Costs 25,000
Machine Running Costs 64,355
Packing : a aleeee 31,200
Required
2) Calculate the overhead recovery rates using Activity-Based Costing.
>) Work out the cost of production of the two components
= LG itd has collected the following data for its two activities,
Activity cost rate is caleulated on the basis
of cost driver capacity
Activity Cost Driver Capacity “Coste
Power Kwh 50,000 kwh 2,00,000
Inspections No of inspections __10,000 Inspections 3,00,000__
The company makes three products Alpha, Beta and Theta,
umiption of cost drivers reported for the year ended 31° March, 2017
Ta TE Ee
a oe 10,000
20,000
—___|__15,000 |
pare a statement of allocation of cost to each product under ABC
| Quality inspections
Theta t re
wt Alu 148.000
we Reta LsS.000
Theta 150.0001
aver ams
A ate Thiwd
Rang BSTC C30 per *™SPEction)
eg four different ¢
ps bes Prompe,
TeRUlar. careless and
ofered. Prepare cust
* four customer
®
mi .
2 ‘
0 20 to
10 is : ‘
20 »” ) so
Regulet 7460
Careless 6,640
Defaulter 4.770 31% )
semens Ltd. manufactures two types of machinery model X 150
X 170
x: sbsorbs overheads on the basis of direct labour hrs.
The vetheads i labour hy
March, 2017 are € 12.42.50 and 20,000 hours ered issn eae
Tespectively. The information about the products is
ss follows :
X 150 X 170
sadzeted production 2500. units 3,125 units
Daect Material cost 300 per unit 2450. per unit
Dgect Labour
X 150 hrs @ % 150 7450
xX 170 shrs @ 7150 600
actvities :
z
Order processing 2,10,000
Machine processing 8,75,000
Product Inspection _1,37,500
Total 12,42,500
__The data relating to these activities : _ : ot
Orders Machine Inspection,
Processed hrs worked hrs
—- 350 | 40007
11,000
_ l 13.000
Calculate cost under ABC
Aus: X 150 226.80 Per unit
Xx 170 216.16 per unit] :
*TL plans to use. ABC to decide its cost. At present it allocates factory overheads to products on the
"S's of direct labour hours. Total factory overheads are as follows ~
Advance Cost Accounting (4 ¢;
4 ‘omy
a'e's" h
Department Factory Cae :
Product support 225,000
*revluction (Factory overheads onl) 1,75,000
Total cost 14,00,000
The company performs four major acl
ities in production support department. These ACtivit,.
With their budgeted costs are as follows :
Production Support Budgeted cost
activities :
Setup 428,750
Production control 245,000
Quality contro! 1,83,750
Materials management 367,500
Total 12,25,000
The company supplies following deta
“Products Ni
Setups | Production | Inspection yj
. labour hrs. orders reauigg
A 10,000, 25,000 | so]; , 80 “He
8 2,000 10,000 oo); @ ls
c 50,000 1,40, 200 | os a
$2,000 | _1,75,000 = Bl
Required :
) Cost as per direct labour hour basis
ii) Costas per ABC
(Ams.: i) Rate & 8 per labour hour
per unit
A 20
B 40
c 22.40
i) A 69.80
B 259.80
c 3.63
Activity Rate 7
Set up 3,430 per setup
Production control 1960 per order
Quality control 2450 per inspection
Material management 490 _per requisition
Production 1 per direct labour hour
‘The budgeted overheads and cost drivers volume of XYZ Lid areas follows:
Cost pool —=«|.-sBudgeted | Cost driver Budgeted
overheads volume
ee a
procurement 5,80,000 | No of orders 1,100
handling 2,50,000 No, of movements 680
4,15,000 No of set up 320
9,70,000 Main. hrs 8,400
uality control 1,76,000 No. of inspections 900
Machiner 7,20,000 _ No. of machine hrs 24,000
The company has produced a batch of 2600 components of AX-15, its material cost was ® 1,30,000 and
labour cost was & 2,45,000. The usage activities ofthe said batch are as follows
Material orders 26 Maint. Hrs, 690
Material movement 18 Inspection 8
vetups 25 Machine hrs 1,800
‘\scertain the cost driver rates. Ascertain the cast of batch of component using ABC tin
spans details have Been recorded for 4 hy
olloe— i
Ac
yt
rr
hes made in a period
mite in
- D__
~ a 120
250 60 200
900
1,650 750 2,100 5.400
1,520 6,880 *300
190 860
avers have been identified:
st pool Cost driver
spine cost Machine hrs
Material handling Material movements
stores Requisitions raised
jnspection No. of inspections
setup No. of setups
gng. SUPPOT Engineering hrs
er volumes: ue
gt bt Batch Al 3B S D Total
chrs per batch 520 255 610 325 1,710
ion; movernent | 180 70 | 205 40 495
ition 40 21 | 43) 26 130
ion 18 BS 13 | 8 47
12 7 16 8 43
ens _— 65 | 38 52 35 190 _
ini ts using traditional
;) Batch & unit costs using traditional costing based on lab hrs overheads absorption rate
ji) Batch & unit cost using ABC
ii) Compare the cost in I & Il
4, Relevat nt data relating to a company are : 7
a Particulars Product
— P Q | R Total
Foluetion & Sales (units) | 60,000 40,000 16,000
jav material usage (units) 10 10) 22
jaw material costs (PU) 750 40) 22 24,76,000
Direct labour hours (PU) | 25 4 2 3,42,000
Machine hours (PU) | 2.5 2 4 2,94,000
Dreet labour costs (PU) | 716 24 12
\i.of production runs | 6 14 40 60
‘i of deliveries 18 6 40 64+
‘a of receipts: 60 140 880 1080
200 50,100
-up (Runs) 60,000
Machines (M hrs) 15,20,000
Receiving (No. of receipts)
Packing (No. of deliveries)
Engineering (No. of production orders)
18.48,000
Leite? a Ee
The company operates a justincime inventory policy and receives each component once per
Production run, ae
179
oes
Advance Cost Acouning yy
Required ;
1) Compute the prot costs seo cet labou-hour covery ae of overhead,
4) Compute Product costs using activity-based costing
°Jaihind Ld, produces a number of products including product Xj and Y,
x Y)
Production 1,000 units 25,000 units
oe 1,000 units 25,000 units
Labour hours per uni 1 hour 6 hour
Total Labour hours - 400,000
Total Overheads 5,00,000
Receiving Componente
Receiving Materials
Disbursing
Seg cere —__
Requirement of product
Component consignments
Material Consignments
Production runs
Required :
1. Statement of ovetheads
7 cost on the basis of direct labour hours
* Statement of overheads cost as per ABC.
10,000 6
| 5,000 runs :
eae
200 100
50 8
10 5
(Traditional system)
[Ans Rate of absorption & 1.25 per labour hour
overheads : X=
Y2=
Activity Based costing
1. Receiving components
6x 1.2!
1x 1.25 =
25 per unit
~75 per unit
= &10 per receipt.
2. Receiving materials = % 12.50 per receipt
3. Disbursing kits = 225 per issue
Overheads cost
Total PU
x 2,875 2.87
Y> 1,225 05
10. Green Light Ltd. produces two types of products viz Traditional and modem. At present the compan
absorbs overheads as per the machine hour basis, Now the CEO of the ‘company decides to go for ARC
Following data are supplied
Products Units Prime Machine | Material Set
Cost Hours [Movements up
Traditional 4,00,000 — 8,00,000 1,00,000 200,000 100
Modern 1,00,000 | 1,50,000 25,000 — 1,00,000 50
Total Cost - | 9,50,000 | 5,00,000 8,50,000 — 6,50,000
Required to calculate cost as per
i) Traditional system
ii) ABC
[Ans.: Total overheads
Rate per hour
ABC
Rate per Machine hour
20,00,000 / 1,25,000
5,00,000 + 8,50,000 + 6,50,000,
20,00,000
16 per Machine hour
rz)
Rate per set up = & 10,000
Allocation fo
asin vow
po al © ai sional © 14,00,000 =F
io Tar 100.000 * 4 + 10,000 x 100)
“a x 25 000 + 10,000 x 50) % 600,000,
wr Ceost : Traditional — 5.50
Modern R750
ud produces three products their standard cost isa: h
pe is as under
wit z
x , 3
is . ?
wat rials 0 40 5
«! ar w 40 5
: abet yerheads 3 40 z a
: 110 129 —
on units) — 10,000 20,000 30,008
cio
us
