COSTING - COMPILATION MODULE 1

ACTIVITY BASED COSTING

QUE 1
PQR pens Ltd. manufactures two products ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for the year
2017:
Annual Output Total Machine Total Number of Total Number of
Product
(Units) Hours Purchase Orders Set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56

The annual overheads are as under:

Particulars `
Volume related activity costs 4,75,020
Set up related cost 5,79,988
Purchase related cost 5,04,992

Calculate the overhead cost per unit of each Product: Gel Pen and Ball Pen on the basis of:
(1) Traditional method of charging overheads
(2) Activity based costing method and
(3) Find out the difference in cost per unit between both the methods.
[(10 Marks) May 2018]

Answer
(1) Statement Showing Overhead Cost per unit “Traditional Method”
Particulars Gel Pen Ball Pen
Overheads @ `20 per machine hour `4,80,000 `10,80,000
(24,000 × 20) (54,000 × 20)
Number of units 5,500 24,000
Overheads Cost Per Unit `87.27 `45.00

Overheads Recovery Rate = Annual Overheads ÷ Annual Machine Hours

= (4,75,020 + 5,79,988 + 5,04,992) ÷ (24,000 + 54,000)
= `15,60,000 ÷ 78,000 = `20 per machine hour

Note: Overheads is recovered on the basis of Machine Hours (as per ICAI suggested answer).

(2) Statement Showing Overhead Cost per unit “Activity Based Costing”
Activity Cost Pool Cost Driver Ratio Amount Gel Pen Ball Pen
Volume related activity Machine Hours 24 : 54 4,75,020 1,46,160 3,28,860
costs
Set up related cost No. of Setups 30 : 56 5,79,988 2,02,321 3,77,667
Purchase related cost No. of Purchase Orders 240 : 448 5,04,992 1,76,160 3,28,832
Total Cost 5,24,641 10,35,359
÷ Total Units 5,500 24,000
Overheads Cost Per Unit `95.39 `43.14
Note: Machine hours is used as Cost driver of volume related activity cost (as per ICAI suggested answer).

(3) Difference in overheads cost per unit under both methods

Particulars Gel Pen Ball Pen
Overheads cost per unit (Traditional method) `87.27 `45.00

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Overheads cost per unit (Activity based cost) `95.39 `43.14

Difference in overheads cost per unit - `8.12 + `1.86

QUE 2
M/s HMB Limited is producing a product in 10 batches each of 15,000 units in a year incurring the following
overheads their on:
Particulars (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800

The prime cost for the year amounted to `3,01,39,000. The company is using currently the method of
absorbing overheads on the basis of prime cost. Now it wants to shift to activity based costing.

Information relevant to activity drivers for a year are as under:

Activity Driver Activity Volume
No. of purchase orders 1,500
Maintenance hours 9,080
No. of set-ups 2,250
No. of inspections 2,710

The company has produced a batch of 15,000 units and has incurred `26,38,700 and `3,75,200 on materials
and wages respectively.

The usage of activities of the said batch are as follows:

Activity Driver Activity Volume
Material orders 48
Maintenance hours 810
No. of set-ups 40
No. of inspections 25

You are required to:

(1) Find out cost of product per unit on absorption costing basis for the said batch.
(2) Determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity
based costing.
[(10 Marks) Nov 2018]

Answer
(1) Statement Showing Unit Cost Using Absorption Costing Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead @ 17.1847% of Prime Cost 5,17,930
Total Cost 35,31,830
÷ Number of units ÷ 15,000
Cost Per Unit `235.46
Calculation of overhead rate:
Overheads Recovery Rate = (Total Overheads ÷ Total Prime Cost) × 100

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= [(22,50,000 + 17,30,000 + 6,84,500 + 5,14,800) ÷ 3,01,39,000] × 100

= 17.1847 % of Prime Cost

(2) Statement Showing Unit Cost and Total Cost Using ABC Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead:
Material procurement (`1,500 × 48 orders) 72,000
Maintenance (`190.53 × 810 hours) 1,54,329
Set-up (`304.22 × 40 set-ups) 12,169
Quality control (`189.96 × 25 inspections) 4,749
Total Cost 32,57,147
Number of units 15,000
Cost Per Unit `217.14

Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material procurement `22,50,000 Material orders 1,500 `1,500 per order
Maintenance `17,30,000 Maintenance hours 9,080 `190.53 per hour
Set-up `6,84,500 No. of set-ups 2,250 `304.22 per set-up
Quality control `5,14,800 No. of inspections 2,710 `189.96 per inspection

QUE 3
MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hours. The budgeted overheads and direct labour hours for the month of March 2019 are `15,00,000 and
25,000 hours respectively.

The information about the company’s products is as follows:

Particulars Equipment A Equipment B
Budgeted Production volume 3,200 units 3,850 units
Direct material cost `350 per unit `400 per unit
Direct labour cost:
Y : 3 hours @ `120 per hour `360 -
Z : 4 hours @ `120 per hour - `480

Overheads of `15,00,000 can be identified with three major activities:

Order Processing `3,00,000

Machine Processing `10,00,000
Product Inspection `2,00,000

These activities are driven by number of orders processed, machine hours worked, and inspection hours,
respectively. The data relevant to these activities is as follows:
Equipments Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

Required:

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(1) Prepare a statement showing the manufacturing cost per unit of each product using the absorption
costing method assuming the budgeted manufacturing volume is attained.
(2) Determine cost driver rates and prepare a statement showing the manufacturing costs of each product
using activity based costing, assuming the budgeted manufacturing volume is attained.
(3) MNO Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application base,
calculate the amount of cost distortion (under-costed or over-costed) for each equipment.
[(10 Marks) May 2019]

Answer
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method
Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads @ `60 per hour `180 `240
Manufacturing cost per unit `890 `1,120

Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `15,00,000 ÷ 25,000 hours = `60 per hour

Total labour hours = 3,200 units of A × 3 hours + 3,850 units of B × 4 hours

= 25,000 hours

(2) Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Order processing `3,00,000 Orders processed 600 `500 per order
Machine processing `10,00,000 Machine hours 50,000 `20 per machine hour
Inspection `2,00,000 Inspection hours 20,000 `10 per inspection hour

Statement Showing Unit Manufacturing Cost Using ABC Method

Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads per unit (W.N.) `218.75 `207.79
Manufacturing cost per unit `928.75 `1,087.79

(3) Statement Showing Cost Distortion

Particulars Equipment A Equipment B
Unit manufacturing cost:
Using direct labour hours as an application base 890 1,120
Using activity based costing 928.75 1,087.79
Cost distortion (-) 38.75 + 32.21

Working note:
Calculation of overheads cost per unit under ABC costing:
Overheads A B
Order processing @ `500 per order of 400/200 orders `2,00,000 `1,00,000
Machine processing `20 per machine hour of 22,500/27,500 hours `4,50,000 `5,50,000
Inspection `10 per inspection hour of 5,000/15,000 hours `50,000 `1,50,000
Total overheads `7,00,000 `8,00,000
÷ Number of units ÷ 3,200 ÷ 3,850
Overhead per unit `218.75 `207.79

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QUE 4
PQR Ltd has decided to analyse the profitability of it’s five new customers. It buys soft drink bottles in cases
at `45 per case and sells them to retail customers at a list price of `54 per case. The data pertaining to five
customers are given below:
Customers
Particulars
A B C D E
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price ` 54 54 54 54 54
Actual Selling Price ` 54 53.40 49 50.20 48.60
Number of Purchase Orders 30 50 60 50 60
Number of Customers Visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers Travelled Per Delivery 40 12 10 20 60
Number of Expediate Deliveries 0 0 0 0 2

Its five activities and their cost drivers are:

Activity Cost Driver
Order taking `200 per purchase order
Customer visits `300 per customer visit
Deliveries `4.00 per delivery km travelled
Product handling `2.00 per case sold
Expedited deliveries `100 per each such delivery

Required:
(1) Compute the customer level operating income of each of five retail customers by using the Cost Driver
rates.
(2) Examine the result to give your comments on customer ‘D’ in comparison with customer ‘C’ and on
customer ‘E’ in comparison with customer ‘A’.
[(10 Marks) Nov 2019]

Answer
(1) Computation of Customer Level Operating Income
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Cases sold 9,360 14,200 62,000 38,000 9,800
Revenue at list price @ `54 p.u. 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Less: Discount - 8,520 3,10,000 1,44,400 52,920
Revenue net of discount 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
Less: COGS @ `45 p.u. 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
Gross Margin 84,240 1,19,280 2,48,000 1,97,600 35,280
Less: Customer level operating 29,120 43,080 1,44,400 93,600 43,200
activities cost (W.N.)
Customer Level Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)

Working note:
Computation of customer level operating activities costs:
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Order taking costs (`) 6,000 10,000 12,000 10,000 12,000
(No. of purchase orders × `200)

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Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800

(No. of customer visits × `300)
Delivery costs (`) 3,200 2,880 4,800 6,400 9,600
(*Kms travelled × `4.00 per km.)
Product handling costs (`) 18,720 28,400 1,24,000 76,000 19,600
(Number of case sold × `2.00)
Cost of expediting deliveries (`) - - - - 200
(No. of expedited deliveries × `100)
Total cost of customer level operating activities 29,120 43,080 1,44,400 93,600 43,200

* Kms travelled = Number of deliveries × Kilometres travelled per delivery

(2) Comment on the results:

Customer D and Customer C: Operating income of Customer D is more than of Customer C, despite having
only 61.29% (38,000 units) of the units volume sold in comparison to Customer C (62,000 units). Customer
C receives a higher percent of discount i.e. 9.26% (`5) while Customer D receive a discount of 7.04% (`3.80).
Though the gross margin of customer C (`2,48,000) is more than Customer D (`1,97,600) but total cost of
customer level operating activities of C (`1,44,400) is more in comparison to Customer D (`93,600). As a
result, operating income is more in case of Customer D.

Customer E and Customer A: Customer E is not profitable while Customer A is profitable. Customer E
receives a discount of 10% (`5.4) while Customer A doesn’t receive any discount. Sales Volume of Customer
A and E is almost same. However, total cost of customer level operating activities of E is far more (`43,200)
in comparison to Customer A (`29,120). This has resulted in occurrence of loss in case of Customer E.

QUE 5
ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and Mixed Fruit. The following
cost data for the month of March 2020 are as under:

Particulars Apple Orange Mixed Fruit

Units produced and sold 10,000 15,000 20,000
Material per unit (`) 8 6 5
Direct Labour per unit (`) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170

Overheads incurred by the company during the month are as under:

Particulars (`)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560

Required:

(1) Calculate cost driver’s rate.

(2) Calculate total cost of each product using Activity Based Costing.
[(6 Marks) Nov 2020]

Answer

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(1) Statement Showing Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Ordering costs 64,000 No. of Purchase Orders 80 `800 per purchase order
Delivery costs 1,58,200 No. of Deliveries 226 `700 per delivery
Shelf Stocking costs 87,560 Shelf Stocking Hours 440 `199 per shelf stocking hours

(2) Statement Showing Total Cost Using Activity Based Costing

Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000
Material cost @ `8/ `6/ `5 per unit 80,000 90,000 1,00,000
Direct Labour @ `5/ `4/ `3 per unit 50,000 60,000 60,000
Production Overhead:
Ordering costs @ `800 per purchase order 27,200 25,600 11,200
(34 × 800) (32 × 800) (14 × 800)
Delivery costs @ `700 per delivery 77,000 44,800 36,400
Shelf Stocking costs @ `199 per hours (110 × 700) (64 × 700) (52 × 700)
21,890 31,840 33,830
Total Cost (110 × 199) (160 × 199) (170 × 199)
2,56,090 2,52,240 2,41,430

QUE 6
ABC Ltd. manufactures three products X, Y and Z using the same plant and resources. It has given the
following information for the year ended on 31st March, 2020:
Particulars X Y Z
Production quantity (in units) 1,200 1,440 1,968
Resources per unit:
Direct materials (`) 90 84 176
Direct labour (`) 18 20 30

Budgeted direct labour rate was `4 per hour and the production overheads, shown in table below, were
absorbed to products using direct labour hour rate. Company followed Absorption Costing Method. However,
the company is now considering adopting Activity Based Costing Method.

Budgeted Overheads (`) Cost Driver Remarks

Material 50,000 No. of orders No. of orders was 25 units for each
Procurement product.
Set-up 40,000 No. of production All the three products are produced in
Runs production runs of 48 units.
Quality Control 28,240 No. of Inspections Done for each production run.
Maintenance 1,28,000 Maintenance hours Total maintenance hours were 6,400
and was allocated in the
ratio of 1:1:2 between X, Y & Z.

Required:
(1) Calculate the total cost per unit of each product using the Absorption Costing Method.
(2) Calculate the total cost per unit of each product using the Activity Based Costing Method.

[(10 Marks) Jan 2021]

Answer
(1) Statement Showing Total Cost Per Unit of Each Product Using Absorption Costing Method

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Particulars X (`) Y (`) Z (`)

Direct Material 90 84 176
Direct Labour 18 20 30
Production Overhead @ `9 per hour 40.50 45 67.50
(9 × 18/4) (9 × 20/4) (9 × 30/4)
Total Unit Cost 148.50 149 273.50

Working Note:
Calculation of overhead rate per direct labour hour:

Overhead recovery rate = Budgeted overheads ÷ Budgeted labour hours

= (50,000 + 40,000 + 28,240 + 1,28,000)÷ 27,360 hours = `9/hour

Budgeted labour hours = 1,200 X × 18/4 + 1,440 Y × 20/4 + 1,968 C × 30/4 = 27,360 hours

(2) Statement Showing Total Cost Per Unit of Each Product Using ABC Method
Particulars X (`) Y (`) Z (`)
Direct Material 90 84 176
Direct Labour 18 20 30
Production OH:
Mat. Procurement 10.81 10.89 10.85
[(48×270.27)/1,200] [(58×270.27)/1,440] [(79×270.27)/1,968]
Set-up 8.68 8.68 8.68
[(25×416.67)/1,200] [(30×416.67)/1,440] [(41×416.67)/1,968]
Quality Control 6.13 6.13 6.13
[(25×294.17)/1,200] [(30×294.17)/1,440] [(41×294.17)/1,968]
Maintenance 26.67 22.22 32.52
[(20×6,400×1/4)/1,200] [(20×6,400×1/4)/1,440] [(20×6,400×1/2)/1,968]
Total Unit Cost 160.29 151.92 264.18

Calculation of Activity rate:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material Procurement `50,000 No. of orders 185 `270.27 per order
Set-up `40,000 No. of production Runs 96 `416.67 per run
Quality Control `28,240 No. of Inspections 96 `294.17 per inspection
Maintenance `1,28,000 Maintenance hours 6,400 `20 per hour

Total no. of orders = (1,200 + 1,440 + 1,968) ÷ 25

= 48 orders + 58 orders + 79 orders = 185 orders

Total no. of production run = (1,200 + 1,440 + 1,968) ÷ 48

= 25 runs + 30 runs + 41 runs = 96 runs

Total no. of inspection = Total no. of runs = 96 inspections

QUE 7
PQR Ltd. is engaged in the production of three Products P, Q and R. the company calculates Activity Cost
Rates on the basis of Cost Driver capacity which is provided as below:
Activity Cost Driver Cost Driver Capacity Cost
Direct Labour hours Labour hours 30,000 Labour hours `3,00,000
Production runs Number of Production runs 600 Production runs `1,80,000
Quality Inspections Number of inspections 8,000 Inspections `2,40,000

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The consumption of activities during the period is as under:

Activity/Products P Q R
Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspections 3,000 2,500 1,500

You are required to:

(1) Compute the costs allocated to each product from each activity.
(2) Calculate the cost of unused capacity for each activity.
(3) A potential customer has approached the company for supply of 12,000 units of a new product ‘S’ to
be delivered in lots of 1,500 units per quarter. This will involve an initial design cost of `30,000 and
per quarter production will involve the following:

Direct Material `18,000

Direct Labour hours 1,500 hours
No. of production runs 15
No. of quality inspections 250

Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per quarter
of product ‘S’ using ABC system considering a mark-up of 20% on cost.
[(10 Marks) July 2021]

Answer
(1) Statement of Cost Allocation to Each Product from Each Activity
Product
Activity
P (`) Q (`) R (`) Total (`)
Direct Labour hours 1,00,000 80,000 60,000 2,40,000
(10,000 × `10) (8,000 × `10) (6,000 × `10)
Production runs 60,000 54,000 48,000 1,62,000
(200 × `300) (180 × `300) (160 × `300)
Quality Inspections 90,000 75,000 45,000 2,10,000
(3,000 × `30) (2,500 × `30) (1,500 × `30)

Working note:

Cost driver rate/Activity rate:

Direct Labour hours = `3,00,000 ÷ 30,000 labour hours = `10 per hour

Production runs = `1,80,000 ÷ 600 production runs = `300 per run

Quality inspection = `2,40,000 ÷ 8,000 inspection runs = `30 per inspection

(2) Computation of cost of unused capacity for each activity:

Direct Labour hours = `3,00,000 - `2,40,000 = `60,000

Production runs = `1,80,000 - `1,62,000 = `18,000
Quality inspection = `2,40,000 - `2,10,000 = `30,000

Total cost of unused capacity is `1,08,000.

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(3) Cost Sheet

Particulars Amount (`)
(A) Direct Cost: 18,000
Direct Material 3,750
Direct expenses: Initial design cost (30,000 × 1,500/12,000) 21,750
Total (A)
(B) Indirect cost: 15,000
Direct Labour hours (1,500 × `10) 4,500
Production runs (15 × `300) 7,500
Quality Inspections (250 × `30) 27,000
Total (B) 48,750
Total cost (A + B) 9,750
Add: Profit @ 20% on cost 58,500
Sales value
Sale Price per unit of S (58,500 ÷ 1,500) 39

QUE 8
A Drug store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. Due to some
constraints, it has decided to go for only one product line of drugs. It has provided the following data for the
year 2020-21 for each product line:
A B C
Revenues `74,50,000 `1,11,75,000 `1,86,25,000
Cost of goods sold `41,44,500 `68,16,750 `1,20,63,750
Number of purchase orders placed 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Items sold 1,75,200 1,50,300 1,44,500

Following additional information is also provided:

Activity Description of activity Total Cost Cost-allocation base
Drug License fee Drug License fee `5,00,000 To be distributed in ratio
2:3:5 between A, B and C
Ordering Placing of orders for purchases `8,30,000 2,000 purchase orders
Delivery Physical delivery and receipt of goods `18,20,000 2,800 deliveries
Shelf stocking Stocking of goods `32,40,000 4,500 hours of shelf-stocking
time
Customer Support Assistance provided to customers `28,20,000 4,70,000 items sold

Required:
1. Calculate the operating income and operating income as a percentage (%) of revenue of each product
line if:
(a) All support cost (other than cost of goods sold) are allocated in the ratio of cost of goods sold.
(b) All support cost (other than cost of goods sold) are allocated using an activity-based costing
system.

2. Give your opinion about choosing the product line on the basis of operating income as a percentage (%)
of revenue of each product line under both the situations as above.
[(10 Marks) Dec 2021]

Answer

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1. (a) Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines on the basis of cost of goods sold of each product)
A (`) B (`) C (`) Total (`)
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Support cost (40% of COGS) 16,57,800 27,26,700 48,25,500 92,10,000
Total cost 58,02,300 95,43,450 1,68,89,250 3,22,35,000
Operating income (Sales – Total cost) 16,47,700 16,31,550 17,35,750 50,15,000
% of Operating income to Sales 22.12% 14.60% 9.32% 13.46%

1. (b) Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines using an activity based costing system)
A (`) B (`) C (`) Total (`)
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug license fee @ `50,000/base point 1,00,000 1,50,000 2,50,000 5,00,000
(50,000 × 2) (50,000 × 3) (50,000 × 5)
Ordering cost @ `415/purchase order 2,32,400 3,36,150 2,61,450 8,30,000
(415 × 560) (415 × 810) (415 × 630)
Delivery cost @ `650/delivery 6,17,500 6,50,000 5,52,500 18,20,000
(650 × 950) (650 × 1,000) (650 × 850)
Shelf stocking cost @ `720/hour 6,48,000 9,00,000 16,92,000 32,40,000
(720 × 900) (720 × 1,250) (720 × 2,350)
Customer Support cost @ `6/unit 10,51,200 9,01,800 8,67,000 28,20,000
(6 × 1,75,200) (6 × 1,50,300) (6 × 1,44,500)
Total cost 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income (Sales – Total cost) 6,56,400 14,20,300 29,38,300 50,15,000
% of Operating income to Sales 8.81% 12.71% 15.78% 13.46%

2. Opinion about choosing the product line: As per first method where we use COGS as a flat rate for
allocating support costs, Drug A seems to be most profitable @ 22.12% and Drug C seems to be least
profitable @ 9.32% but this is deceptive method. ABC method on the other hand uses the cost driver
in each of the support costs for allocating it to the product line. Thus, it is much more accurate.
Accordingly now Drug C seems to be most profitable at 15.78% and Drug A seems to be the least
profitable at 8.81%. Therefore, it is suggested that company should go with Drug C.

Working notes:

(a) Total support cost = `5,00,000 + `8,30,000 + `18,20,000 + `32,40,000 + `28,20,000

= `92,10,000

(b) Total COGS = `41,44,500 + `68,16,750 + `1,20,63,750 = `2,30,25,000

92,10,000
(c) % of support cost to COGS= × 100 = 40%
2,30,25,000

(d) Calculation of Cost Driver Rate

Activity Total cost (`) Cost allocation base Cost driver rate
(1) (2) (3) (4) = [(2)÷(3)]
Drug License fee 5,00,000 2 : 3 : 5 total 10 `50,000 per base point
Ordering 8,30,000 2,000 purchase orders `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery

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Shelf-stocking 32,40,000 4,500 hours `720 per stocking hour

Customer support 28,20,000 4,70,000 items sold `6 per item sold

QUE 9
Star Limited manufacture three products using the same production methods. A conventional product
costing system is being used currently. Details of the three products for a typical period are:
Particulars AX BX CX
Direct Labour hours per unit 1.00 0.90 1.50
Machine hours per unit 2.00 1.50 2.50
Direct Material per unit (`) 35 25 45
Volume (units) 7,500 12,500 25,000

Direct Labour costs `20 per hour and production overheads are absorbed on a machine hour basis. The
overhead absorption rate for the period is `30 per machine hour.
Management is considering using Activity Based Costing system to ascertain the cost of the products.
Further analysis shows that the total production overheads can be divided as follows:
Cost relating to set up 40%
Cost relating to machinery 10%
Cost relating to material handling 30%
Cost relating to Inspection 20%

The following activity volumes are associated with the product line for the period as a whole. Total activities
for the period:
Particulars AX BX CX Total
Number of set-ups 350 450 740 1,540
Number of movement of Materials 200 280 675 1,155
Number of inspections 200 400 900 1,500
Required:
1. Calculate the cost per unit of each product using the conventional method.
2. Calculate the cost per unit of each product using activity based costing method.
[(10 Marks) May 2022]

Answer
1. Statement Showing “Cost per unit as per Conventional Method”
Particulars AX (`) BX (`) CX (`)
Direct Materials 35 25 45
Direct Labour [(1, 0.9, 1.5 hours) × `20] 20 18 30
Production Overheads [(2, 1.5, 2.5 hours) × `30] 60 45 75
Cost per unit 115 88 150

2. Statement Showing “Cost per unit as per ABC Method”

Particulars AX (`) BX (`) CX (`)
Production (units) 7,500 12,500 25,000
Direct Materials @ `35/`25/`45 per unit 2,62,500 3,12,500 11,25,000
Direct Labour @ `20/`18/`30 per unit 1,50,000 2,25,000 7,50,000
Production Overhead:
Setup Costs @ `750 per setup 2,62,500 3,37,500 5,55,000
(750 × 350) (750 × 450) (750 × 740)
Machine Related Costs @ `3 per hour 45,000 56,250 1,87,500

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 COSTING - COMPILATION MODULE 1

(3 × 15,000) (3 × 18,750) (3 × 62,500)

Material Handling Cost @ `750 per movement 1,50,000 2,10,000 5,06,250
(750 × 200) (750 × 280) (750 × 675)
Inspection Costs @ `385 per inspection 77,000 1,54,000 3,46,500
(385 × 200) (385 × 400) (385 × 900)
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost ÷ Units) 126.267 103.62 138.81

Working Notes:
(a) Total Machine Hours = 7,500 × 2 + 12,500 × 1.5 + 25,000 × 2.5 = 96,250 hours

(b) Total Production OH = 96,250 machine hours × `30 =`28,87,500

(c) Statement Showing Cost Driver Rate:

Cost Pool % Overheads Cost Driver Basis Volume Cost Driver Rate
Set-up 40% 11,55,000 No of set ups 1,540 750/Setup
Machine related cost 10% 2,88,750 No of Machine Hours 96,250 3/Machine Hour
Material handling 30% 8,66,250 No of Material movements 1,155 750/Movement
Inspection 20% 5,77,500 No of inspections 1,500 385/Inspection
Total - 28,87,500 - - -

PYQ 10
XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee. It furnishes the
following data for a year:
Actual Output Total Machine Total Number of Total Number of
Products
(units) Hours Purchase set ups
Express Coffee 5,000 20,000 160 20
Instant Coffee 60,000 1,20,000 384 44

The annual overheads are as under:

Particulars Amount
Machine Processing costs 7,00,000
Set up related costs 7,68,000
Purchase related costs 6,80,000

You are required to:

(a) Compute the costs allocated to each product – Express Coffee and Instant Coffee from each activity on
the basis of Activity – Based Costing (ABC) method.
(b) Find out the Overhead cost per units of each product – Express coffee and instant coffee based on (a)
above.
[(4 Marks) Nov 2022]

Answer
(a) Statement Showing Cost Allocated to Each Product Using Activity Based Costing
Activity Cost Pool Cost Driver Ratio Amount Express coffee Instant coffee
Machine Processing No. of machine hours 20 : 120 7,00,000 1,00,000 6,00,000
Set up related costs No. set ups 20 : 44 7,68,000 2,40,000 5,28,000
Purchase related costs No. of purchase 160 : 384 6,80,000 2,00,000 4,80,000
Total Cost `5,40,000 `16,08,000

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 COSTING - COMPILATION MODULE 1

(b) Overhead cost per unit:

Express coffee = 5,40,000 ÷ 5,000 = `108
Instant coffee = 16,08,000 ÷ 60,000 = `26.80

QUE 11
Beta Limited produces 50,000 Units, 45,000 Units and 62,000 Units of product ‘A’, ‘B’ and ‘C’ respectively. At
present the company follows absorption costing method and absorbs overhead on the basis of direct labour
hours. Now, the Company wants to adopt Activity Based Costing.

The information provided by Beta Limited is as follows:

Product A Product B Product C
Floor Space Occupied 5,000 Sq. Ft. 4,500 Sq. Ft. 6,200 Sq. Ft.
Direct Labour Hours 7,500 Hours 7,200 Hours 7,800 Hours
Direct Machine Hours 6,000 Hours 4,500 Hours 4,650 Hours
Power Consumption 32% 28% 40%

Overhead for year are as follows:

Rent & Taxes `8,63,500
Electricity Expense `10,66,475
Indirect labour `13,16,250
Repair & Maintenance `1,28,775
`33,75,000

Required:
(1) Calculate the overhead rate per labour hour under Absorption Costing.
(2) Prepare a cost statement showing overhead cost per unit for each product – ‘A’, ‘B’ and ‘C’ as per
Activity based Costing.
[(5 Marks) May 2023]

Answer
(1) Overhead rate per labour hour = Overhead ÷ Labour hours
= `33,75,000 ÷ 22,500 hours (7,500 + 7,200 + 7,800)
= `150 per labour hour

(2) Statement Showing Overheads Cost per Unit

(Using Activity based Costing)
Activity Cost Pool Cost Driver Ratio Amount Product A Product B Product C
Rent & Taxes Floor space 50:45:62 8,63,500 2,75,000 2,47,500 3,41,000
Electricity Expense Power consumption 32:28:40 10,66,475 3,41,272 2,98,613 4,26,590
Indirect labour Direct labour hours 75:72:78 13,16,250 4,38,750 4,21,200 4,56,300
Repair & Maintenance Machine hours 600:450:465 1,28,775 51,000 38,250 39,525
Total Cost 11,06,022 10,05,563 12,63,415
÷ Total Units ÷50,000 ÷45,000 ÷62,000
Overheads Cost Per Unit `22.12 `22.35 `20.38

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