Chapter 4 - Activity Based Costing

Activity Based Costing

Question 1 - Study Material
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C. The budgeted costs and
production for the year ending 31st March, 20X8 are as follows:
Particulars A B C
Production quantity 4,000 3,000 1,600
(units)
Resources per unit
- Direct material (kg.) 4 6 3
- Direct labour 30 45 60
(minutes)
The budgeted direct labour rate was ₹ 10 per hour, and the budgeted material cost was ₹ 2 per kg. Production
overheads were budgeted at ₹ 99,450 and were absorbed to products using the direct labour hour rate. ABC
Ltd. followed an Absorption Costing System. ABC Ltd. is now considering to adopt an Activity Based Costing
system. The following additional information is made available for this purpose.
1. Budgeted overheads were analyzed into the following: in (₹)
Material handling - 29,100
Storage costs - 31,200
Electricity - 39,150
2. The cost Driver identified were as follows:
Material handling - Weight of material handled
Storage costs - Number of batches of material
Electricity - Number of Machine operations
3. Data on Cost Driver was as follows:
Particulars A B C
For completion production:
Batches of material 10 5 15
Per unit of production:
Number of machine 6 3 2
operato₹
You are requested to:
1) PREPARE a statement for management showing the unit costs and total costs of each product using the
absorption costing method.
2) PREPARE a statement for management showing the product costs of each product using the ABC
approach.
3) STATE what are the reasons for the different product costs under the two approaches?

Question 2 - Study Material

MST Limited has collected the following data for its two activities. It calculates activity cost rates based on
cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hour 5,000 kilowatt hour ₹ 2,00,000
Quality inspections Number of 10,000 inspections ₹ 3,00,000
inspections
The company makes three products M, S and T. For the year ended March 31, 20X9, the following
consumption of cost Driver was reported:
Product Kilowatt hour Quality inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) COMPUTE the costs allocated to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) DISCUSS the facto₹ the management Consider in choosing a capacity level to compute the budgeted fixed
overhead cost rate.

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Question 3 - Study Material

ABC Ltd. Manufactures two types of machinery equipment Y and Z and applies/absorbs overheads on the
basis of direct-labour hour. The budgeted overheads and direct-labour hour for the month of December, 20X8
are ₹ 12,42,500 and 20,000 hour respectively. The information about Company’s products is as follows:
Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ₹ 300 per unit ₹ 450 per unit
Direct labour cost
Y : 3 hour @ ₹ 150 per hour
X : 4 hour @ ₹ 150 per hour ₹ 450 ₹ 600
ABC Ltd.’s overheads of ₹ 12,42,500 can be identified with three major activities: Order Processing ( ₹
2,10,000), machine processing ( ₹ 8,75,000), and product inspection ( ₹ 1,57,500). These activities are driven
by number of order processed, machine hour worked, and inspection hour, respectively. The data relevant to
these activities is as follows:
Particulars Order processed Machine hour worked Inspection hour
X 350 23,000 4,000
Y 250 27,000 11,000
Total 600 50,000 15,000
Required:
(i) Assuming use of direct-labour hour to absorb/apply overheads to production, COMPUTE the unit
manufacturing cost of the equipment Y and Z, if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity-based costing, COMPUTE the unit manufacturing costs of the equipment Y and Z,
if the budgeted manufacturing volume is achieved.
(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hour as an application base,
CALCULATE the amount of cost distortion (under-costed or over-costed) for each equipment.

Question 4 - Study Material

T Limited specializes in the distribution of pharmaceutical products. It buys from the pharmaceutical
companies and resells to each of the three different markets.
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April, 20X9 in respect of ₹T Limited has been reported:
Particulars General Drugstore Chains Chemist Shops
Supermarket (₹) (₹)
Chains (₹)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold per 82,500 27,500 4,950
delivery
Number of deliveries 330 825 2,750
In the past, ₹T Limited has used gross margin percentage to evaluate the relative profitability of its distribution
channels. The company plans to use activity –based costing for analyzing the profitability of its distribution
channels. The Activity analysis of ₹T Limited is as under:
Activity Area Cost Driver
Customer purchase order processing Purchase order by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store per
delivery
Shelf-stocking at customer store hour of shelf-stocking
The April, 20X9 operating costs (other than cost of goods sold) of ₹T Limited are ₹ 8,27,970. These operating
costs are assigned to five activity areas. The cost in each area and the quantity of the cost allocation basis
used in that area for April, 20X9 are as follows:

Activity Area Total costs in April, Total Units of Cost Allocation

20X9 (₹) Base used in April, 20X9
Customer purchase order processing 2,20,000 5,500 order

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Line-item ordering 1,75,560 58,520 line items

Store delivery 1,95,250 3,905 store deliveries
Cartons dispatched to store 2,09,000 2,09,000 cartons
Shelf-stocking at customer store 28,160 1,760 hour

Other data for April, 20X9 include the following:

Particulars General Supermarket Drugstore Chemist Shops
Chains Chains
Total number of order 385 990 4,125
Average number of line items per 14 12 10
order
Total number of store deliveries 330 825 2,750
Average number of cartons 300 80 16
shipped per store delivery
Average number of hour of 3 0.6 0.1
shelf-stocking per store delivery
Required:
(i) COMPUTE for April, 20X9 gross-margin percentage for each of its three distribution channels and compute
T Limited’s operating income.
(ii) COMPUTE the April, 20X9 rate per unit of the cost-allocation base for each of the five activity areas.
(iii) COMPUTE the operating income of each distribution channel in April, 20X9 using the activity-based costing
information. Comment on the results. What new insights are available with the activity-based cost
information?
(iv) DESCRIBE four challenges one would face in assigning the total April, 20X9 operating costs of ₹ 8,27,970
to five activity areas.

Question 5 - Study Material

Alpha Limited has decided to analyze the profitability of its five new customers. It buys bottled water at ₹ 90
per case and sells to retail customers at a list price of ₹ 108 per case. The data pertaining to five customers
are:
Particulars customers
A B C D E
Cases sold 4,680 19,688 1,36,800 71,550 8,775
List Selling ₹ 108 ₹ 108 ₹ 108 ₹ 108 ₹ 108
Price
Actual Selling ₹ 108 ₹ 106.20 ₹ 99 ₹ 104.40 ₹ 97.20
Price
Number of 15 25 30 25 30
Purchase
order
Number of 2 3 6 2 3
Customer
visits
Number of 10 30 60 40 20
deliveries
Kilomete₹ 20 6 5 10 30
travelled per
delivery
Number of 0 0 0 0 1
expedited
deliveries
Its five activities and their cost Driver are:
Activity Cost Driver rate
Order taking ₹ 750 per purchase order
Customer visits ₹ 600 per customer visit
Deliveries ₹ 5.75 per delivery Km travelled

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 Chapter 4 - Activity Based Costing

Product handling ₹ 3.75 per case sold

Expedited deliveries ₹ 2,250 per expedited delivery
Required:
(i) COMPUTE the customer-level operating income of each of five retail customers now being examined (A, B,
C, D and E). Comment on the results.
(ii) STATE what insights are gained by reporting both the list selling price and the actual selling price for each
customer?

Question 6 - May 2018

PQR Pens Ltd. manufactures two products - 'Gel Pen' and 'Ball Pen'. It furnishes the following data for the year
2017:
Product Annual Output Total machine hour Total number of Total number of set ups
(units) purchase order
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 costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each product - Gel Pen and Ball Pen on the basis of:
(i) Traditional method of charging overheads
(ii) Activity based costing method and
(iii) Find out difference in cost per unit between both the methods.

Question 7 - Nov 2018

M/s. HMB Limited is producing a product in 10 batches each of 15,000 units in a year and incurring following
overheads there on (amount in ₹) :
Material procurement - 22,50,000
Maintenance - 17,30,000
Set - up - 6,84,500
Quality control - 5,14,800
The prime costs 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 Driver for a year are as under:
Activity driver - Activity volume
No. of purchase order - 1,500
Maintenance hour - 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 material
and wages respectively. The usage of activities of the said batch are as follows:
Material order - 48 order
Maintenance hour - 810 hour
No. of set ups - 40
No. of inspections - 25
You are required to:
(i) Find out cost of product per unit on absorption costing basis for the said batch.
(ii) Determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity
based costing.

Question 8 - May 2019

MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hour. The budgeted overheads and direct labour hour for the month of March 2019 are ₹ 15,00,000 and 25,000
hour respectively. The information about the company's products is as follows:
Particulars Equipment
A B

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Budgeted production volume 3,200 units 3,850 units

Direct material cost ₹ 350 per unit ₹ 400 per unit
Direct labour cost
A: 3 hour @ 120 per hour ₹ 360
B: 4 hour @ 120 per hour ₹ 480
Overheads of ₹ 15,00,000 can be identified with the following three major activities:
Order processing - ₹ 3,00,000
Machine processing - ₹ 10,00,000
Product inspection - ₹ 2,00,000
These activities are driven by the number of order processed, machine hour worked and inspection hour
respectively. The data relevant to these activities is as follows:
Particulars order processed Machine hour Inspection hour
worked
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000
Required:
(i) Prepare a statement showing the manufacturing cost per unit of each product using the absorption costing
method assuming the budgeted manufacturing volume is attained.
(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of each
product using activity based costing, assuming the budgeted manufacturing volume is attained.
(iii) MNO Ltd's selling prices are based heavily on cost. By using direct labour hour as an application base,
calculate the amount of cost distortion (under costed or over costed) for each equipment.

Question 9 - Rtp May 2018

G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows:
Particulars Product A Product B Product C
Direct materials 50 40 40 ₹/u
Direct labour @ ₹ 30 40 50 ₹/u
10/hour
Production overheads 30 40 50 ₹/u

Total cost 110 120 140 ₹/u

Quantity produced 10,000 20,000 30,000 Units
G-2020 Ltd. was absorbing overheads on the basis of direct labour hour. A newly appointed management
accountant has suggested that the company should introduce ABC system and has identified cost Driver and
cost pools as follows:
Activity cost pool Cost driver Associated cost (₹)
Stores receiving Purchase requisitions 2,96,000
Inspection Number of production runs 8,94,000
Dispatch order executed 2,10,000
Machine set up Number of set ups 12,00,000
The following information is also supplied:
Particulars Product A Product B Product C
No. of set ups 360 390 450
No. of order executed 180 270 300
No. of production runs 750 1,050 1,200
No. of purchase 300 450 500
requisitions
Required:
CALCULATE activity based production cost of all the three products.

Question 10 - Rtp - Nov 2018

Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce
and Packaged food. Family store provides the following data for the year 20X7-X8 for each product line:
Particulars Soft drinks Fresh produce Packaged food
Revenue ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500

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Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000

Cost of bottles ₹ 60,000 ₹0 ₹0
returned
Number of purchase 360 840 360
order placed
Number of deliveries 300 2,190 660
received
hour of shelf 540 5,400 2,700
stocking time
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 20X7-X8:
Activity Description of Total cost Cost allocation
activity base
Bottle returns Returning of empty ₹ 60,000 Direct tracing to soft
bottles drink line
Ordering Placing of order for ₹ 7,80,000 1,560 purchase
purchases order
Delivering Physical delivery ₹ 12,60,000 3,150 deliveries
and receipt of goods
Shelf stocking Stocking of goods ₹ 8,64,000 8,640 hour of shelf
on store shelves and stocking time
ongoing restocking
Customer support Assistance provided ₹ 15,36,000 15,36,000 items
to customers sold
including check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on the
basis of cost of goods sold of each product line. CALCULATE the operating income and operating income as a
% of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and
activity based costing system, CALCULATE the operating income and operating income as a % of revenues for
each product line.

Question 11 - Rtp - May 2019

MST Limited has collected the following data for its two activities. It calculates activity cost rates based on
cost driver capacity.
Activity Cost driver Capacity Cost (₹)
Power Kilowatt hour 50,000 kilowatt hour 40,00,000
Quality inspections No. of inspections 10,000 inspections 60,00,000
The company makes three products M, S and T. For the year ended March 31, 20X9, the following
consumption of cost Driver was reported:
Product Kilowatt hour Quality inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the facto₹ the management Consider in choosing a capacity level to compute the budgeted fixed
overhead cost rate.

Question 12 - Rtp - Nov 2019

SMP Pvt. Ltd. manufactures three products using three different machines. At present the overheads are
charged to products using labour hour. The following statement for the month of September 2019, using the
absorption costing method has been prepared:
Particulars Product X (using Product Y (using Product Z (using
machine A) machine B) machine C)

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 Chapter 4 - Activity Based Costing

Production units 45,000 52,500 30,000

Material cost per 350 460 410
unit (₹)
Wages per unit @ ₹ 240 400 560
80 per hour
Overhead cost per 240 400 560
unit (₹)
Total cost per unit 830 1,260 1,530
(₹)
Selling price (₹) 1,037.50 1,575 1,912.50
The following additional information is available relating to overhead cost Driver.
Cost driver Product X Product Y Product Z Total
No. of machine 40 160 400 600
set ups
No. of purchase 400 800 1,200 2,400
order
No. of 1,000 2,200 4,800 8,000
customers
Actual production and budgeted production for the month is same. worker are paid at standard rate. Out of
total overhead costs, 30% related to machine set-ups, 30% related to customer order processing and customer
complaint management, while the balance proportion related to material ordering.
Required:
(i) COMPUTE overhead cost per unit using activity based costing method.
(ii) DETERMINE the selling price of each product based on activity-based costing with the same profit mark-up
on cost.

Question 13 - May 2005

A B C D Co. Ltd. produces and sells four products A, B, C and D. These products are similar and usually
produced in production runs of 10 units and sold in a batch of 5 units. The production details of these
products are as follows:
Product A B C D
Production (Units) 100 110 120 150
Cost per unit:
Direct material ( ₹) 30 40 35 45
Direct labour ( ₹) 25 30 30 40
Machine hour (per unit) 5 4 3 4

The production overheads during the period are as follows:

Particulars (₹) (₹)
Factory works expenses 22,500
Stores receiving costs 8,100
Machine set up costs 12,200
Cost relating to quality control 4,600
Material handling and dispatch 9,600 57,000
The cost Driver for these overheads are detailed below:
Cost Cost Driver
Factory works expenses Machine hour
Stores receiving costs Requisitions raised
Machine set up costs No. of production runs
Cost relating to quality control No. of production runs
Material handling and dispatch No. of order executed
The number of requisitions raised on the stores was 25 for each product and number of order executed was
96, each order was in a batch of 05 units.
Required:
(i) Total cost of each product assuming the absorption of overhead on machine hour basis;
(ii) Total cost of each product assuming the absorption of overhead by using activity base costing; and
(iii) Show the differences between (i) and (ii) and comment.

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Question 14 - Nov 2005

ABC Limited manufactures two radio models, the Nova which has been produced for five year and sells for ₹
900, and the Royal, a new model introduced in early 2004, which sells for ₹ 1,140. Based on the following
Income statement for the year 2004-05, a decision has been made to concentrate ABC Limited’s marketing
resources on the Royal model and to begin to phase out the Nova model.
ABC Limited - Income Statement for the year ending March 31, 2005
Particulars Royal Model (₹) Nova Model (₹) Total (₹)
Sales 45,60,000 1,98,00,000 2,43,60,000
Cost of Goods sold 31,92,000 1,25,40,000 1,57,32,000
Gross margin 13,68,000 72,60,000 86,28,000
Selling & Administrative 9,78,000 58,30,000 68,08,000
Expenses
Net Income 3,90,000 14,30,000 18,20,000
Unit Produced and sold 4,000 22,000
Net Income per unit sold 97.50 65

The standard unit costs for the Royal and Nova models are as follows:
Particulars Royal Model (₹) Nova Model (₹)
Direct materials 584 208
Direct Labour
Royal (3.5 h₹ x ₹ 12) 42
Nova (1.5 h₹ x ₹ 12) 18
Machine usage
Royal (4 h₹ x ₹ 18) 72
Nova (8 h₹ x ₹ 18) 144
Manufacturing overheads 100 200
(applied on the basis of
machine hour at a
pre-determined rate of ₹ 25 per
hour)
Standard Cost 798 570
ABC Ltd.'s Controller is advocating the use of activity-based costing and activity-based cost management and
has gathered the following information about the company's manufacturing overheads cost for the year
ending March 31, 2005.
Activity centre (Cost driver) Traceable Number of Events
Costs (₹) Royal Nova Total
Soldering (Number of solder 9,42,000 3,85,000 11,85,000 15,70,000
joints)
Shipments (Number of 8,60,000 3,800 16,200 20,000
shipments)
Quality control (Number of 12,40,000 21,300 56,200 77,500
Shipments)
Purchase order (Number of 9,50,400 1,09,980 80,100 1,90,080
order)
Machine Power (Machine 57,600 16,000 1,76,000 1,92,000
hour)
Machine setups (Number of 7,50,000 14,000 16,000 30,000
setups)
Total Traceable costs 48,00,000

Required:
(i) Prepare a Statement showing allocation of manufacturing overheads using the principles of activity-based
costing.
(ii) Prepare a Statement showing product cost profitability using activity-based costing.
(iii)Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model? Discuss.

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Solution 14:
Statement Showing Allocation of Manufacturing Overheads Using Principles of Activity Based Costing.
Activity Centre Traceable cost ₹ Cost allocation Cost allocation basis
basis Royal (₹) Nova (₹)
Soldering 9,42,000 385 : 1185 2,31,000 7,11,000
Shipments 8,60,000 38 : 162 1,63,400 6,96,600
Quality control 12,40,000 213 : 562 3,40,800 8,99,200
Purchase order 9,50,400 109980 : 80100 5,49,900 4,00,500
Machine lower 57,600 16 : 176 4,800 52,800
Machine set ups 7,50,000 14 : 16 3,50,000 4,00,000
48,00,000 16,39,900 31,60,100
Units produced and 4,000 22,000
sold
Manufacturing ₹ 409.98 ₹ 143.64
Overheads Cost per
unit

(ii) Statement Showing Product Cost and Profitability using Activity Based Costing
Particulars Royal (per unit cost ₹) Nova (per unit cost ₹) Total ₹
Standard cost other 698 370
than manufacturing
OHs cost
Manufacturing OHs 409.98 143.64
using activity-based
costing
Cost 1,107.98 513.64
Selling Price/unit 1,140 900
Gross Margin / unit 32.02 386.36
Gross Margin 1,28,080 84,99,920 86,28,000
Selling & Adm. 9,78,000 58,30,000 68,08,000
Expenses
Net Income (8,49,920) 26,69,920 18,20,000

(iii) Novo Model should continue to be bread and butter product and Royal model should not be
over-emphasized; rather it’s pricing is required to be corrected.

Question 15 - May 2006

ABC Bank is examining the profitability of its Premier Account, a combined Savings and Cheque account.
Deposito₹ receive a 7% annual interest on their average deposit. ABC Bank earns an interest rate spread of 3%
(the difference between the rate at which it lends money and rate it pays to deposito₹) by lending money for
home loan purpose at 10%.
The Premier Account allows deposito₹ unlimited use of services such as deposits, withdrawals, cheque
facility, and foreign currency drafts. Deposito₹ with Premier Account balances of ₹ 50,000 or more receive
unlimited free use of services. Deposito₹ with minimum balance of less than ₹ 50,000 pay ₹ 1,000-a-month
service fee for their Premier Account.
ABC Bank recently conducted an activity-based costing study of its services. The use of these services in
2005-06 by three customers is as follows:
Particulars Activity- Based Account usage
Cost Per Customer X Customer Y Customer Z
Transaction
Deposits/withdraw ₹ 125 40 50 5
al with teller
Deposits/withdraw ₹ 40 10 20 16
al with automatic
teller machine
(ATM)

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Deposits/withdraw ₹ 25 0 12 60
al on prearranged
monthly basis
Bank Cheques ₹ 400 9 3 2
written
Foreign Currency ₹ 600 4 1 6
drafts
Inquiries about ₹ 75 10 18 9
Account balance
Average Premier ₹ 55,000 ₹ 40,000 ₹ 12,50,000
Account balance
for 2005-06

Assume Customer X and Z always maintains a balance above ₹ 50,000, whereas Customer Y always has a
balance below ₹ 50,000.
Required:
(i) Compute the 2005-06 profitability of the customers X, Y and Z Premier Account at ABC Bank.
(ii) What evidence is there of cross-subsidisation among the three Premier Accounts? Why might ABC Bank
worry about this Cross-subsidisation, if the Premier Account product offering is Profitable as a whole?
(iii) What changes would you recommend for ABC Bank’s Premier Account?

Question 16 - Nov 2006

ABC Ltd. Manufactures two types of machinery equipments Y and Z and applies/absorbs overheads on the
basis of direct-labour hour. The budgeted overheads and direct-labour hour for the month of December, 2006
are ₹ 12,42,500 and 20,000 hour respectively. The information about Company’s products is as follows:
Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ₹ 300 per unit ₹ 450 per unit
Direct labour cost
Y : 3 hour @ ₹ 150 per hour
X : 4 hour @ ₹ 150 per hour ₹ 450 ₹ 600
ABC Ltd.’s overheads of ₹ 12,42,500 can be identified with three major activities: Order Processing ( ₹
2,10,000), machine processing ( ₹ 8,75,000), and product inspection ( ₹ 1,57,500). These activities are driven
by number of order processed, machine hour worked, and inspection hour, respectively. The data relevant to
these activities is as follows:
Particulars order processed Machine hour worked Inspection hour
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000
Required:
(i) Assuming use of direct-labour hour to absorb/apply overheads to production, compute the unit
manufacturing cost of the equipments Y and Z, if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity-based costing, compute the unit manufacturing costs of the equipments Y and Z,
if the budgeted manufacturing volume is achieved.
(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hour as an application base,
calculate the amount of cost distortion (under-costed or over-costed) for each equipment.
(iv) Discuss, how an activity-based costing might benefit ABC Ltd.

Question 17 - Study Material

Humara - Apna’ bank offe₹ three products, viz., deposits, Loans and Credit Cards. The bank has selected 4
activities for a detailed budgeting exercise, following activity based costing methods. The bank wants to know
the product wise total cost per unit for the selected activities, so that prices may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost (₹) Estimation for the budget period

ATM Services:

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a) Machine Maintenance 4,00,000 All fixed, no change.

b) Rents 2,00,000 Fully fixed, no change.
c) Currency Replenishment 1,00,000 Expected to double during budget
Cost period.
7,00,000 (This activity is driven by no. of ATM
transactions)
Computer Processing 5,00,000 Half this amount is fixed and no
change is expected.
The variable portion is expected to
increase to three times the current
level.
(This activity is driven by the number
of computer transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are
made. In the budget period, 5 lakh
statements are expected.
For every increase of one lakh
statement, one lakh rupees is the
budgeted increase.
(This activity is driven by the number
of statements)
Computer Inquiries 2,00,000 Estimated to increase by 80% during
the budget period.
(This activity is driven by telephone
minutes)
The activity Driver and their budgeted quantifies are given below:
Activity Driver Deposits Loans Credit Cards
No. of ATM Transactions 1,50,000 --- 50,000
No. of Computer Processing 15,00,000 2,00,000 3,00,000
Transactions
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit Card
Accounts.
Required:
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per account for each product using (i) and (ii) above.

Question 18 - Study Material

Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating to a period are as
under:
Particulars P Q R
Machine hour per unit 10 18 14
Direct Labour hour per unit 4 12 8
Direct Material per unit (₹) 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 hour. The machine hour rate of overheads is ₹ 6 per hour. Direct labour hour rate is ₹ 20 per hour.The
company proposes to use activity based costing system and the activity analysis is as under:

Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase order 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%

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Machine operation costs……………………………………. 30%

Inspection costs……………………………………………… 40%
Material procurement related costs……………………….10%
Required
(i) CALCULATE the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hour.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.

Question 19 - Study Material

Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce
and Packaged food. Family store provides the following data for the year 2019-20 for each product line:
Soft drinks Fresh produce Packaged food
Revenues ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500
Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase order placed 360 840 360
Number of deliveries received 300 2,190 660
hour of shelf-stocking time 540 5,400 2,700
Items Sold 1,26,000 11,04,000 3,06,000

Family store also provides the following information for the year 2019-20:
Activity Description of activity Total Cost Cost-allocation base
Bottles returns Returning of empty bottles ₹ 60,000 Direct tracing to soft
drink line
Ordering Placing of order for ₹ 7,80,000 1,560 purchase order
purchases
Delivery Physical delivery and ₹ 12,60,000 3,150 deliveries
receipt of goods
Shelf stocking Stocking of goods on store ₹ 8,64,000 8,640 hour of
shelves and on - going shelf-stocking time
restocking
Customer Assistance provided to ₹ 15,36,000 15,36,000 items sold
Support customers including
check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on the
basis of cost of goods sold of each product line. CALCULATE the operating income and operating income as a
% of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and
activity-based costing system, CALCULATE the operating income and operating income as a % of revenues for
each product line.

Question 20 - Study Material

BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three ranges of beauty
soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted costs and production
for the month of December, 2020 are as follows:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond

Production of 4,000 3,000 2,000
soaps (Units)
Resources Qty Rate Qty Rate Qty Rate
per Unit:
Essential Oils 60 ml ₹ 200 / 100 ml 55 ml ₹ 300 / 100 ml 65 ml ₹ 300 / 100 ml

Cocoa Butter 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g

Filtered 30 ml ₹ 15 / 100 ml 30 ml ₹ 15 /100 ml 30 ml ₹ 50 / 100 ml
Water
Chemicals 10 g ₹ 30 /100 g 12 g ₹ 50 / 100 g 15 g ₹ 60 / 100 g

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 Chapter 4 - Activity Based Costing

Direct Labour 30 ₹ 10 / hour 40 ₹ 10 /hour 60 ₹ 10 / hour

minutes minute minut
s es
Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to its
products using direct labour hour rate, which were budgeted at ₹ 1,98,000.
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost Driver is provided below:
Particulars (₹) Cost Driver
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hour
Utilities 80,000 Number of Machine
operations
The number of machine operato₹ per unit of production are 5, 5, and 6 for BABYSOFT- Gold, BABYSOFT- Pearl,
and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii)
Mass of output produced is equivalent to the mass of input materials taken together.)
You are requested to:
(i) PREPARE a statement showing the unit costs and total costs of each product using the absorption costing
method.
(ii) PREPARE a statement showing the product costs of each product using the ABC approach.
(iii) STATE what are the reasons for the different product costs under the two approaches?

Question 21 - Rtp May 2021

The following budgeted information relates to N Ltd. for the year 2021:
Products Products Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000

(₹) (₹) (₹)

Selling price per unit 90 180 140
Direct cost per unit 50 90 95
hour hour hour
Machine department 3 4 5
(machine hour per unit)
Assembly department 6 4 3
(direct labour hour per unit)

The estimated overhead expenses for the year 2021 will be as below:
Machine Department ₹ 73,60,000
Assembly Department ₹ 55,00,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hour
Assembly Department On the basis of labour hour
After a detailed study of the activities the following cost pools and their respective cost Driver are found:
Cost Pool Amount (₹) Cost Driver Quantity
Machining services 64,40,000 Machine hour 9,20,000 hour
Assembly services 44,00,000 Direct labour hour 11,00,000 hour
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer order 7,200 order
Purchasing 4,00,000 Purchase order 800 order

As per an estimate the activities will be used by the three products:

Product Product Product
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer order 2,200 2,400 2,600
Purchase order 300 350 150

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 Chapter 4 - Activity Based Costing

You are required to PREPARE a product-wise profit statement using:

(i) Absorption costing method;
(ii) Activity-based method.

Question 22 - Rtp Nov 2020

KD Ltd. is following Activity based costing. Budgeted overheads, cost Driver and volume are as follows:
Cost pool Budgeted overheads (₹) Cost driver Budgeted volume
Material procurement 18,42,000 No. or order 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hour 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was ₹ 24,62,000 and wages ₹ 4,68,500.
Usage activities of the said batch are as follows:
Material order 56
Material movements 84
Maintenance hour 1,420 hour
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.

Question 23 - Rtp May 2020

Following are the data of three product lines of a departmental store for the year 2019 -20:
Soft drinks Fresh produce Packaged food
Revenues ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500
Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase order placed 360 840 360
Number of deliveries received 300 2,190 660
hour of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000

Additional information related with the store are as follows:

Activity Description of activity Total Cost Cost-allocation base

Bottles returns Returning of empty ₹ 60,000 Direct tracing to soft

bottles drink line
Ordering Placing of order for ₹ 7,80,000 1,560 purchase order
purchases
Delivery Physical delivery and ₹ 12,60,000 3,150 deliveries
receipt of goods
Shelf stocking Stocking of goods on ₹ 8,64,000 8,640 hour of shelf-
store shelves and stocking time
on-going restocking
Customer Support Assistance provided to ₹ 15,36,000 15,36,000 items sold
customers including
check-out
Required:
CALCULATE the total cost and operating income using Activity Based Costing method.

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Question 24 - Mtp April 2021

RVP Cinema provides the following data for the year 2020-21:
Particulars Premium Hall Recliner Hall 7D Hall (₹) Cafeteria (₹)
(₹) (₹)
Revenue 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods sold - - - 4,51,125
Digital media cost 6,19,800 9,46,875 4,02,900 -
Number of Credit Card transactions 75,000 90,000 60,000 45,000

Number of Tests 12,000 18,000 15,000 7,500

Number of Setups 225 450 150 75
Area in Square feet 3,000 4,500 2,250 750
Number of Customer contacts 2,62,500 3,00,000 1,50,000 37,500

Number of Customer online order 2,10,000 2,47,500 1,20,000 22,500

Cost analysis has revealed the following:

Activity Activity Cost Activity Driver Activity
(₹) Capacity
Marketing Expenses 2,25,000 Number of Customer 7,50,000
contacts
Website Maintenance Expenses 1,50,000 Number of Customer online 6,00,000
order
Credit Card Processing Fees 1,35,000 No. of Credit Card 2,70,000
Transactions
Cleaning Equipment Cost 3,15,000 Number of square feet 10,500
Inspecting and testing costs 2,62,500 Number of tests 52,500
Setting up machine's costs 4,50,000 Number of set-ups 900
Required:
(i) If RVP Cinema allocates all costs (other than Cost of Goods sold and Digital Media costs) to the
departments on the basis of Activity Based Costing system, CALCULATE the operating income and percentage
of operating income of each department.
(ii) RVP Cinema operated for year under the assumption that profitability can be increased by increasing net
revenue from Cafeteria. However, the Supervisor of RVP Cinema wants to shut down Cafeteria. On the basis of
(i) above, STATE whether the contention of the Supervisor is valid or not.

Question 25 - Mtp March 2021

ABY Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The following
information relates to production period December, 2020:
Product A B C D
Output in units 1,440 1,200 960 1,008
Cost per unit:
Direct Materials ₹ 84 ₹ 90 ₹ 80 ₹ 96
Direct Labour ₹ 20 ₹ 18 ₹ 14 ₹ 16
Machine hour per unit 4 3 2 1
The four products are similar and are usually produced in production runs of 48 units per batch and are sold in
batches of 24 units. Currently, the production overheads are absorbed using machine hour rate. The
production overheads incurred by the company for the period December, 2020 are as follows:
(₹)
Machine department costs:
Rent, deprecation and supervision 2,52,000

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Set-up Costs 80,000

Store receiving costs 60,000
Inspection 40,000
Material handling and dispatch 10,368
During the period December, 2020, the following cost Driver are to be used for allocation of overheads cost:
Cost Cost driver
Set-up Costs Number of production runs (batches)
Stores receiving Requisition raised
Inspection Number of production runs (batches)
Material handling and dispatch order executed
It is also determined that:
(i) Machine department costs should be apportioned among set-up, stores receiving and inspection activities
in proportion of 4 : 3 : 2.
(ii) The number of requisitions raised on stores is 50 for each product. The total number of material handling
and dispatch order executed during the period are 192 and each order being for a batch size of 24 units of
product.
Required:
(i) CALCULATE the total cost of each product, if all overhead costs are absorbed on machine- hour rate basis.
(ii) CALCULATE the total cost of each product using activity-based costing.

Question 26 - Jan 2021

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:
X Y Z
Production Quantity (units) Cost per unit: 1200 1440 1968
Direct Material (₹) 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 order No. of order was 25 units for each
Procurement product.
Set-up 40,000 No. of production All the three products are produced
Runs in production runs of 48 units.
Quality Control 28,240 No. of Inspections Done for each production run.
Maintenance 1,28,000 Maintenance hour Total maintenance hour 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.

Question 27 - Nov 2020

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 order 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking hour 110 160 170

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

(₹)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560
Required:
(i) Calculate cost driver's rate.
(ii) Calculate total cost of each product using Activity Based Costing.

Question 28 - Nov 2019

PQR Ltd has decided to analyse the profitability of its 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:
Particulars customers
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 order 30 50 60 50 60
Number of customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometer travelled per delivery 40 12 10 20 60
Number of expedite Deliveries 0 0 0 0 2

Its five activities and their cost Driver are:

Activity Cost Driver
Order taking ₹ 200 per purchase order
Customer visits ₹ 300 per each visit
Deliveries ₹ 4.00 per delivery km travelled
Product Handling ₹ 2.00 per case sold
Expedited deliveries ₹ 100 per such delivery
You are required to :
(i) Compute the customer level operating income of each of five retail customers by using the Cost Driver
rates.
(ii)Examine the results to give your comments on Customer 'D' in comparison with Customer 'C' and on
Customer 'E' in comparison with Customer 'A'.

Question 29 - Rtp Nov 2021

Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce
and Packaged food. Family store provides the following data for the year 2020-21 for each product line:
Soft drinks Fresh produce Packaged food

Revenues ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500

Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase order placed 360 840 360
Number of deliveries received 300 2,190 660
hour of shelf-stocking time 540 5,400 2,700

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 Chapter 4 - Activity Based Costing

Items sold 1,26,000 11,04,000 3,06,000

Family store also provides the following information for the year 2020-21:
Activity Description of activity Total Cost (₹) Cost-allocation base

Bottles returns Returning of 60,000 Direct tracing to soft drink

empty bottles line
Ordering Placing of order for 7,80,000 1,560 purchase order
purchases
Delivery Physical delivery and 12,60,000 3,150 deliveries
receipt of goods
Shelf stocking Stocking of goods on 8,64,000 8,640 hour of shelf-
store shelves and on- stocking time
going restocking
Customer Support Assistance provided to 15,36,000 15,36,000 items sold
customers including
check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on the
basis of cost of goods sold of each product line. CALCULATE the operating income and operating income as a
% of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and
activity-based costing system, CALCULATE the operating income and operating income as a % of revenues for
each product line.

Question 30 - July 2021

PQR Ltd. is engaged in the production of three products P , Q , 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 hour Labour hour 30,000 Labour hour 3,00,000
Production Runs No. of Production 600 Production Runs 1,80,000
Runs
Quality Inspections No. of Inspection 8000 Inspection 2,40,000

The consumption of activities during the period is as under:

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

You are required to:

(i) Compute the costs allocated to each Product from each activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iii) A potential Customer has approached the company for the supply of 12,000 units of a new product ‘S’ to
be delivered in lots of 1500 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 hour 1,500 hour
No. of Production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating Direct and Indirect Costs and compute the Sale value per quarter of Product ‘S’
using ABC system considering a markup of 20% on Cost.

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Question 31 - Rtp May 2022

PCP Limited belongs to the apparel industry. It specializes in the distribution of fashionable garments. It buys
from the industry and resells the same to the following two different supermarkets:
(i) Supermarket A dealing in Adults’ garments (Age group 15 - 30)
(ii) Supermarket B dealing in Kids’ garments (Age group 5 - 10)
The following data for the month of April in respect of PCP Limited has been reported:
Supermarket A (₹) Supermarket B (₹)
Average revenue per delivery 1,69,950 57,750
Average cost of goods sold per delivery 1,65,000 55,000
Number of deliveries 660 1,650
In the past, PCP Limited has used gross margin percentage to evaluate the relative profitability of its
supermarket segments.
The company plans to use activity –based costing for analyzing the profitability of its supermarket segments.
The April month’s operating costs (other than cost of goods sold) of PCP Limited are
₹ 16,55,995. These operating costs are assigned to five activity areas. The cost in each area and Activity
analysis including cost driver for the month of April are as follows:
Activity Area Total costs (₹) Cost Driver
Store delivery 3,90,500 Store deliveries
Cartons dispatched to store 4,15,250 Cartons dispatched to a store per delivery

Shelf-stocking at customer 64,845 hour of shelf-stocking

store
Line-item ordering 3,45,400 Line-items per purchase order
Customer purchase order 4,40,000 Purchase order by customers
processing
Other data for the month of April include the following:
Supermarket A Supermarket B
Total number of store deliveries 1,100 2,805
Average number of cartons shipped per store delivery 250 50
Average number of hour of shelf-stocking per store delivery 6 1.5

Average number of line items per order 14 12

Total number of order 770 1,980
Required:
(i) COMPUTE gross-margin percentage for each of its supermarket segments and compute PCP Limited’s
operating income.
(ii)COMPUTE the operating income of each supermarket segments using the activity- based costing
information.

Question 32 - Dec 2021

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:
Drug Types
A B C
Revenues (in ₹) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in ₹) 41,44,500 68,16,750 1,20,63,750
Number of purchase order placed (in nos) 560 810 630
Number of deliveries received 950 1,000 850
hour of shelf-stocking time 900 1,250 2,350
Units sold (in Nos) 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,C
Ordering Placing of order for 8,30,000 2,000 purchase order
purchases

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Delivery Physical delivery and 18,20,000 2,800 deliveries

receipts of goods
Shelf stocking Stocking of goods 32,40,000 4,500 hour of
shelf-stocking time
Customer support Assistance provided to 28,20,000 4,70,000 units sold
customers
You are required to:
(i) Calculate the operating income and operating income as a percentage (%) of revenue of each product line
if:
(a) All the support costs (other than costs of goods sold) are allocated in the ratio of cost of goods sold.
(b) All the support costs (other than costs of goods sold) are allocated using the activity-based costing
system.
(ii) 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.

Question 33 - Mtp Oct 2021

Breezle Ltd. Has decided to analyse the profitability of its five new customers. It buys soft drink bottles in
cases at ₹. 54 per case and sells them to retail customers at a list price of ₹. 64.80 per case. The data
pertaining to five customers are given below.
Particulars customers
Aey Bee Cee Dee Eey
Number of cases sold 9,360 14,200 62,000 38,000 9,800
List Selling Price (₹) 64.80 64.80 64.80 64.80 64.80
Actual Selling Price (₹) 64.80 64.08 58.80 60.24 58.32
Number of purchase order 30 50 60 50 60
Number of customer visits 4 6 12 4 6
Number of deliveries 20 60 120 80 40
Kilometres travelled per delivery 40 12 10 20 60
Number of expediate deliveries 0 0 0 0 2
Its five activities and their cost Driver are:
Activity Cost Driver
Order taking ₹ 240 per purchase order
Customer visits ₹ 360 per each visit
Deliveries ₹ 4.80 per delivery km travelled
Product Handling ₹ 2.40 per case sold
Expedited deliveries ₹ 120 per such delivery
You are required to:
(i) Compute the customer level operating income of each of five retail customers by using the Cost Driver
rates.
(ii) Examine the results to give your comments on Customer ‘Dee’ in comparison with Customer ‘Cee’ and on
Customer ‘Eey’ in comparison with Customer ‘Aey’.

Question 34 - Mtp Nov 2021

The following budgeted information relates to B Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(₹) (₹) (₹)
Selling price per unit 45 90 70
Direct cost per unit 25 45 50
hour hour hour
Machine department (machine hour per unit) 3 4 5
Assembly department (direct labour hour per unit) 6 4 3
The estimated overhead expenses for the year 2021 will be as below:

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Machine Department ₹ 36,80,000

Assembly Department ₹ 27,50,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hour
Assembly Department On the basis of labour hour
After a detailed study of the activities the following cost pools and their respective cost Driver are found:
Cost Pool Amount (₹) Cost Driver Quantity
Machining services 32,20,000 Machine hour 9,20,000 hour
Assembly services 22,00,000 Direct labour hour 11,00,000 hour
Set-up costs 4,50,000 Machine set-ups 9,000 set-ups
Order processing 3,60,000 Customer order 7,200 order
Purchasing 2,00,000 Purchase order 800 order
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer order 2,200 2,400 2,600
Purchase order 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.

Question 35 - May 2022

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:
Product Labour H₹. per unit Machine H₹. per unit Materials per Unit1 Volume in Units

AX 1.00 2.00 35 7,500

BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 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:
Particulars %
Cost relating to set-ups 40
Cost relating to machinery 10
Cost relating to material handling 30
Costs relating to inspection 20
Total production overhead 100
The following activity volumes are associated with the product line for the period as a whole. Total activities
for the period:
Product No. of set-ups No. of movements of Materials No. of inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500
Required:
i. Calculate the cost per unit for each product using the conventional method.
ii. Calculate the cost per unit for each product using activity based costing method.

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Question 36 - Mock Sept 2022

SMD Limited manufactures four products namely A, B, C and D using the same production and process
facilities. The company has been following conventional method of costing and wishes to shift to
activity-based costing system. The data pertaining to four products are:
Product Units Material per unit (₹) Labour hour per unit Machine hour per unit
produced
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4
The following activity volumes are associated to the production process for the relevant period -
Number of Inspections Number of Material Movements Number of set-ups
A 200 15 100
B 250 20 125
C 900 100 600
D 650 85 400
The cost data also states that:
· Direct Labour cost: ₹ 60 per hour
· Machine hour rate: ₹ 280 per hour
· Production overheads are absorbed on machine hour basis.
For activity-based costing, a thorough, analysis of the production process revealed that:
Costs relating to set-ups and inspection bea₹ the equal percentage while costs relating to machinery accounts
for 20% of the production overhead.
Costs relating to material handling stands at 50% of costs relating to machinery.
You are required to:
1.Prepare a statement showing the unit costs and total costs of each product using the absorption costing
method.
2.Prepare a statement showing the unit costs and total costs of each product using activity - based costing
system.

Question 37 - Mock Oct 2022

ANI Limited is a trader of a Product Z. It has decided to analyse the profitability of its five new customers. It
buys Z article at ₹5,400 per unit and sells to retail customers at a listed price of ₹6,480 per unit. The data
pertaining to five customers are:
customers
A B C D E
Units sold 4,500 6,000 9,500 7,500 12,750
Listed Selling Price ₹6,480 ₹6,480 ₹6,480 ₹6,480 ₹6,480
Actual Selling Price ₹6,480 ₹6,372 ₹5,940 ₹6,264 ₹5,832
Number of Purchase order 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilomete₹ travelled per delivery 20 6 5 10 30
Number of expedited deliveries 0 0 0 0 1
Its five activities and their cost Driver are:
Activity Cost Driver Rate
Order taking ₹4,500 per purchase order
Customer visits ₹3,600 per customer visit
Deliveries ₹7.50 per delivery Km travelled
Product handling ₹22.50 per case sold
Expedited deliveries ₹13,500 per expedited delivery

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 Chapter 4 - Activity Based Costing

Required:
1. COMPUTE the customer-level operating income of each of five retail customers (A, B, C, D and E).
2. STATE the facto₹ ANI Limited should consider in deciding whether to drop a customer.

Question 38 - Nov 2022

XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee. It furnishes the
following data for a year:
Product Actual Output (units) Total Machine Total Number of Total Number of set
hour Purchase order 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 ₹.
Machine Processing costs Set up related 7,00,000
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 unit of each product – Express coffee and Instant coffee based on (a) above.

Question 39 - May 2023

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
hour. 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 hour 7,500 hour 7,200 hour 7,800 hour
Direct Machine hour 6,000 hour 4,500 hour 4,650 hour
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:
a. Calculate the overhead rate per labour hour under Absorption Costing.
b. Prepare a cost statement showing overhead cost per unit for each product – ‘A’, ‘B’ and ‘C’ as per Activity
based Costing.

Question 40 - Rtp May 2023

Hygiene Care Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as
follows:
Particulars Hand Wash Detergent Powder Dishwasher
Direct Materials (₹. / Pu) 150 120 120
Direct Labour @₹.10/ hour (₹. / Pu) 45 60 75
Production Overheads (₹. / Pu) 40 50 40
Total Cost (₹. / Pu) 235 230 235
Quantity Produced (Units) 30,000 60,000 90,000
Hygiene Care Ltd. was absorbing overheads on the basis of direct labour hour. Management accountant has
suggested that the company should introduce ABC system and has identified cost Driver and cost pools as
follows:

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 Chapter 4 - Activity Based Costing

Activity Cost Pool Cost Driver Associated Cost

Goods Receiving Number of Dispatch Order 8,88,000
Inspecting and Testing costs Number of Production Runs 26,82,000
Dispatching Number of dispatch order 6,30,000
Storage Cost Number of Batches of material 36,00,000
The following information is also supplied:
Details Hand Wash Detergent Powder Dishwasher
Batches of material 720 780 900
Number of dispatch order 360 540 600
No. of Production Runs 1,500 2,100 2,400
Number of Dispatch order 600 900 1,000
Required: CALCULATE activity-based production cost of all the three products.

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