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Activity Based Cost Accounting Problems

The document describes a company that currently uses traditional costing to allocate overhead costs based on machine hours. It is proposing to switch to activity-based costing (ABC). ABC would trace overhead costs to specific activities like machine setup, operations, inspections, and procurement. These activities would be assigned as cost pools and allocated to products based on relevant cost drivers like batch size, number of orders, and inspections per batch. The document asks to calculate product costs under traditional and ABC methods and comment on any differences revealed.

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Vicky Vignesh
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163 views3 pages

Activity Based Cost Accounting Problems

The document describes a company that currently uses traditional costing to allocate overhead costs based on machine hours. It is proposing to switch to activity-based costing (ABC). ABC would trace overhead costs to specific activities like machine setup, operations, inspections, and procurement. These activities would be assigned as cost pools and allocated to products based on relevant cost drivers like batch size, number of orders, and inspections per batch. The document asks to calculate product costs under traditional and ABC methods and comment on any differences revealed.

Uploaded by

Vicky Vignesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Activity Based Costing Problems

Q2. A company manufactures three types of products namely P, Q and R. The data relating to a period are as under:

P Q R
Machine hours per unit 10 18 14
Direct labor hour per unit @ Rs. 20 4 12 8
Direct Material per unit (Rs.) 90 80 120
Production (units) 3,000 5,000 20,000

Currently the company uses traditional costing method and absorbs all production overheads on the basis of
machine hours. The machine hour rate of overheads is Rs. 6 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:

P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8

Number of inspections per batch 5 4 3

The total production overheads are analysed as under:


Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%

Required:
a) Calculate the cost per unit of each product using traditional method of absorbing all production overheads on
the basis of machine hours.
b) Calculate the cost per unit of each product using activity based costing principles.
c) Comment briefly on differences disclosed between overhead traced by present system and those traced by
activity based costing.
Q3. Traditional Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows:
Traditional Ltd. was absorbing overheads on the basis of direct labor hours. A newly appointed management accountant has suggested that the
company
should introduce ABC system and has identified cost drivers and cost pools as follows:
Particulars Product A Product B Product C
Direct materials 50 40 40 Rs. / u
Direct labor @ 30 40 50 Rs. / u
Rs.10 / hour
Production 30 40 50 Rs. / u
overheads
Total Cost 110 120 140 Rs. / u
Quantity 10,000 20,000 30,000 Units
produced

Activity Cost Pool Cost Driver Associated Cost


Stores Receiving Purchase Requisitions 2, 96,000
Inspection Number of Production runs 8,94,000
Dispatch Orders Executed 2, 10,000
Machine Setup Number of setups 12,00,000

The following information is supplied:

Details Product A Product B Product C


No. of Setups 360 390 450
No. of Orders Executed 180 270 300
No. of Production runs 750 1,050 1,200
No. of Purchase 300 450 500
Requisitions

You are required to calculate activity based production cost of all the three
products.

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