Activity Based Costing
Questions:
Q.1 Fruitolay has decided to increase the size of the store. It wants the informations about the
probability of the individual product lines:
Lemon, grapes and papaya. It provides the following data for the 2009 for each product line:
Lemon Grapes Papaya
Revenues Rs.79,350.00 Rs.2,10,060.00 Rs. 1,20,990.00
Cost of goods sold Rs. 60,000.00 Rs. 1,50,000.00 Rs. 90,000.00
Cost of bottles returned Rs. 1,200.00 Rs. 0 Rs. 0
Number of purchase
Orders placed 36 84 36
Number of deliveries received 30 219 66
Hours of shelf stocking time 54 540 270
Items sold 12,600 1,10,400 30,600
Fruitolay also provides the following information for the year 2009:
Sr.No Activity Description of Activity Total costs Cost allocation
Rs. basis
1. Bottle returns Returning of empty 1,200.00 Direct tracing to product
bottles to the store line
2. Ordering Placing of orders of 15,600.00 156 purchase orders
purchases
3. Delivery Physical delivery and the 25,200.00 315 deliveries
receipts of merchandise
4. Self-stocking Stocking of merchandise 17,280.00 864 hours of time
on store shelves and
ongoing restocking
5. Customer Assistance provided to 30,720.00 1,53,600 items sold
support customers including
bagging and checkout
Required:
(i) Fruitolay currently allocates store support costs (all costs other than the cost of goods sold)
to product line on the basis of the cost of goods sold of each product line. Calculate the
operating income and operating income as the percentage of revenue of each product line.
(ii) If Fruitolay allocates store support costs (all costs other than the cost of goods sold) to the
product lines on the basis of ABC system, calculate the operating income and operating
income as the percentage of revenue of each product line.
(iii) Compare both the system.
Q.2 MK Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The
following information relates to a production period:
Product A B C D
Output in Units 720 600 480 504
The four products are similar and are usually produced in production runs of 24 units and sold in
batches of 12 units. The total overheads incurred by the company for the period are as follows:
Rs.
Machine operation and maintenance cost 63,000
Setup costs 20,000
Store receiving 15,000
Inspection 10,000
Material handling and dispatch 2,592
During the period the following cost drivers are to be used for the overhead cost:
Cost Cost driver
Setup Receiving No. of production runs
Store receiving Requisition raised
Inspection No. of production runs
Material handling and dispatch Orders executed
It is also determined that:
• Machine operation and maintenance cost should be apportioned between setup cost, store
receiving and inspection activity in the ratio 4:3:2.
• Number of requisition raised on store is 50 for each product and the no.of0 orders executed is
192, each order being for a batch of 12 units of a product.
Calculate the total overhead cost per unit of each product using activity based costing after finding
activity wise overheads allocated to each product.
Q.3 A company manufactures several products of varying design and models. It uses a single
overhead recovery rate based on direct labour hours. The overheads incurred by the Company in
the first half of the year are as under:
Rs.
Machine operation expenses 20, 25,000
Machine maintenance expenses 3, 75,000
Salaries of technical staff 12, 75,000
Wages and salaries of store staff 5, 25,000
During this period, the company introduced activity based costing system and the following
significant were activities were identified:
• Receiving materials and components
• Set up of machines for production runs
• Quality inspection
It is also determined that:
• The machine operation and machine maintenance expenses should be apportioned between
store and production activity in 1:4 ratio.
• The technical staff salaries should be apportioned between machine maintenance, set up and
quality inspection in 3:4:4 ratio.
The consumption of activates during the period under review are as under:
• Direct labour hours worked 80,000
• Production set-ups 4,080
• Material and components consignments received from suppliers 3,920
• Number of quality inspection carried out 2,560
The direct wages rate is Rs. 12 per hour.
The data relating to two products manufactured by the company during the period are as under:
P Q
Direct Materials costs Rs 12,000 8,000
Direct labour hours Hrs. 960 100
Direct Materials Consignments received nos 48 52
Production runs nos. 36 24
Number of quality inspection done nos. 30 10
Quantity Produced Unit in nos. 15,000 5,000
A potential customer has approached the company for the supply of 24,000 units of a component
‘R’ to be delivered in lots of 3000 units per quarter. The job will involve an initial design cost of Rs.
60,000 and the manufacture will involve the following per quarter.
Direct Materials costs Rs. 12,000
Direct labour hours Hrs. 300
Production runs nos. 6
Inspection nos. 24
Number of consignment of direct materials to be received nos. 20
You are required to
1. Calculate the cost of products P and Q based on the existing system of single overheads Recovery
rate.
2. Determine the most of products P & Q using Activity Based Costing system.
3. Compute the sales values per quarter of components ‘R’ using Activity Based Costing system (
considering a mark up of 25% on cost)
Q.4 Linex Limited manufactures three products P, Q and R which are similar in nature and are usually
produced in production runs of 100 units. Product P and R requires both machine hours and
assembly hours, whereas product Q requires only machine hours. The overheads incurred by the
company during the first quarter are as under:
Rs.
Machine Department expenses 18, 48,000
Assembly Department Expenses 6, 72,000
Setup Costs 90,000
Store receiving cost 1, 20,000
Order processing and dispatch 1, 80,000
Inspection and Quality control cost 36,000
The data related to the three products during the period are as under:
P Q R
Units produced and sold 15000 12000 18000
Machine hours worked 30000 hrs. 48000 hrs. 54000 hrs.
Assembly hour worked
(Direct labour hours) 1500C hrs. - 27000 hrs.
Customers orders executed 1250 1000 1500
(In numbers)
Numbers of requisitions raised on the stores 40 30 50
Prepare a statement showing details of overheads costs allocated to each products type using activity
based costing.
Q.5 X Ltd. makes a single products with the following details.
Description Current Situation Proposed Change
Selling Price (Rs. /Unit) 10
Direct Costs (Rs. /Unit) 5
Present number of setups per production 42
period,(before each production run, setup is
done)
Cost per set up (Rs.) 450 Decrease by Rs.90
Production units per run 960 1008
Engineering hours for production period 500 422
Cost per engineering hour(Rs.) 10
The company has begun Activity Based Costing of fixed costs and has presently identified two cost drivers,
viz. production runs and engineering hours. Of the total fixed costs presently at Rs. 96,000, after the
above, Rs. 72,100 remains to be analyzed. There are changes as proposed above for the next production
period for the same volume of output.
(i) How many units and in how many production runs should X Ltd. produce in the changed scenario
in order to break- even?
(ii) Should X Ltd. continue to break up the remaining fixed costs into activity based costs? Why?
