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Job Costing

Meaning
Methods of Costing are broadly classified into (1) Specific Order Costing and (2) Operation Costing.
The tenn Specific Order Costing refers to the basic costing method which is applicable where the work
consists of separate contracts, jobs or batches. The specific order costing is further classified into Job
Costing, Batch Costing and Contract Cpsting. Job Costing is that fonn of specific order costing which
applies where industries which manufacture products or render services against specific orders such as
civil contracts, construction works, automobile repair shop, printing press, machine tool manufacturing,
ship building and furniture making etc.
1. DEFINITION OF JOB COSTING
The tenn Job Costing may be defines as "in job costing, costs are collected and accumulated
according to jobs, contracts, products or work orders. Each job is treated as a separat~ entity for the
purpose of costing. The material and labour costs are complied through the respective abstracts and
overheads are charged on predetennined basis to arrive at the total cost."
Features of Job Order Costing
Some of the important features of this method of costing are given below:
(1) Works or production are undertaken against the order of customers.
(2) Production is not as a continuous process because each job is accepted by work order basis not
for stock or future sales.
(3) Each job is treated as a separate entity for the purpose of costing.
(4) There is no unifonnity in the flow of production because of different production process.
(5) Costs are collected and accumulated after the completion of each job or products in order to
find out profit or loss on each job.
(6) The jobs differ from each other requiring separate work in progress maintained for each job.
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448
Objectives of Job Order Costing
The following are the important objectives of Job Costing:
(1) Job costing provides accurate cost information for each job or product.
(2) It enables management to reduce the cost by making comparison of each elements of actual
costs with estimated ones.
(3) It helps management to measure the operational efficiency and inefficiency for each job or
works to take effective decision making.
(4) This method enables management to providing proper valuation of work in progress.
Advantages of Job Order Costing
The following are the various advantages of Job order costing:
(1) It helps management to identifying profitable and unprofitable jobs.
(2) It provides required information for preparation of estimates while submitting quotations for
similar jobs.
(3) It facilitates effective cost control by evaluating operational efficiency of each job or works.
(4) It helps management to fix selling price of each order or each job.
(5) Spoilage and defective works can be easily identified with each job or person.
(6) It facilitates the application cost-plus formula of pricing of large contracts.
(7) It facilitates the introduction of budgetary control of overheads, since the overheads are charged
on predetermined basis to arrive at the total costs.
Disadvantages
(1) This method is relatively involve more labour intensive. Thus, it is expensive.
(2) With increase in clerical work, there are chances for committing more errors and mistakes.
(3) Job Costing is essentially historical costing. It does not provide for the control of cost unless it
is combined with estimated or standard costing system.
(4) It is difficult to make cost comparison among different jobs because each job has its own
features.
Pre-requisites for Job Costing
In order to ensure the successful application of Job Costing method, it is essential to consider the
following pre-requisites :
(1) A sound production planning and controlling system.
(2) An appropriate time booking and time keeping system to avoid idle time.
(3) Maintenance of necessary records with regard to job tickets, work order, operation tickets, bills
of materials and tools requirements etc.
(4) Appropriate methods of overhead apportionment and absorption rate.
(5) Effective designing and scheduling of production.
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Job, Batch and Process Costing
Job Costing Procedure
The procedure of job costing may be adopted for costing purposes is briefly given below :
(1) Customer's Enquiry: Production or job order is executed on the basis of enquiries received from
the customers. The routine enquiries may be related to expected estimated costs to be incurred, quality to
be maintained and duration for production planning etc.
(2) Quotation for the Job: As per the customer's enquiry and specifications of work or job, a
responsible person is preparing the estimates or quotation and price is fixed for a specific job. And the
same conveyed to the customer appropriately.
(3) Customer's Order: If the quotation is satisfactory to the customer, he may place an order.
(4) Production Order: As soon as an order is received, the Production Planning and Controlling
Department will make out a production order. It is in the form of instructions issued to the foremen to execute
the order and to control its physical progress. It contains all the information regarding the production.
Accordingly production control department assign a production order number for each order or job.
(5) Cost Accumulation: The Cost Accountant is responsible to prepare a Job Cost Card on the basis
of production order. It is also termed as "Job Cost Sheet." For each job the costs are collected and recorded
under separate production order number. The sources of collection of costs are :
(a) Direct material can be identified or obtained either from Bill of Materials or Requisition
Slips or Invoices in the case of direct purchases.
(b) Wages paid to direct labour is associated with a job and can be identified or recorded with
the help of Time Sheet, Job Cards and Wage Analysis Sheet.
(c) Direct expenses are identified on the basis of direct expenses vouchers.
(d) Overheads are apportioned on some predetermined basis. It can be accumulated with the
use of standing order numbers or cost account numbers.
(6) Completion of Jobs: After completion of a job, the final report is sent to the costing department
with regard to charging of material, labour, and overheads are recorded on the job cost sheet. The actual
cost recorded under each element of cost is ascertained to find out the total cost. Any deviations from the
estimated costs are also noted to take the corrective actions.
(7) Profit or Loss on Job: It is determined by comparing the actual cost with the price obtained.
Illustration: 1
From the following details, you are required to calculate the cost of Job No.215 and find out the price
to give a profit of 25% on total cost
Rs.
Materials 2000
Wages
Dept. A 30 hours @ Rs.3 per hour
B 20 hours @ Rs.2 per hour
C 10 hours @ Rs.5 per hour

Overhead expenses for these three departments were estimated as follows :

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450
Variable Overheads
Dept. A Rs. 1,000 for 1,000 labour hours
B Rs. 6,000 for 3,000 labour hours
C Rs. 2,000 for 400 labour hours
Fixed Overheads
Estimated at Rs.l0000 for 5000 normal working hours.
Solution:
Job Cost Sheet (Job. No.2IS)
Amounts Amounts
Rs. Rs.
Direct Materials 2000
Wages
Dept. A =30hrs x Rs.3 = 90
B =20hrs x Rs.2 = 40
C = 10 hrs x Rs.5 = 50 180
Variable Overheads

Rs. 1,000
Dept. A = 30 x
1,000 hrs
= 30
Rs.6,OOO
Dept. B = 20 x
3,000 hrs
= 40

Rs.2,OOO
Dept. A = lOx =50 120
400 hrs

Fixed Overheads

Rs.lO,OOO 120
60 hrs x =
5,000 hrs 2,420
Total Cost

Profit 25% on total cost [~

100
x 2.420 ] = 605

Selling Price Rs.3,025

Illustration: 2
The information given below has been taken from the records of an engineering works in respect
of Job. No. 111 and Job. No. 222.
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Job, Batch and Process Costing

Job. No.ll] Job. No.222

Rs. Rs.
Materials Supplied 5,000 3,000
Wages Paid 1,100 800
Direct Expenses 400 200
Material transfer from 222 to III 300 300
Materials return to stores 200
You are required to find out the cost of each of Job and calculate profit or loss if any assuming that Job No. 222
is completed and invoiced to the customer at Rs. 4000/-.

Solution:
Job. No. 111
Particulars Amount Particulars Amount
Rs. Rs.
To Materials 5,000 By Balance c/d 6,800
To Wages 1,100
To Direct Expenses 400
To Material transferred
From Job. No. 222 300
6,800 6,800
To Balance bid 6,800

Job. No. 222

Particulars Amount Particulars Amount
Rs. ~
Rs.
To Materials 3,000 By Materials transferred
To Wages 800 to Job. No. III 300
To Direct Expenses 200 By Materials return to stores 200
To P & L Alc By Sales 4,000
(Profit transferred) 500
4,500 4,500

Illustration: 3
The accounts of the RR Engineering Company Ltd. show the following cost figures for 2003 :
Rs.
Materials consumed 3,50,000
Direct manual and machine labour wages 2,70,000
Works overhead expenses 8,10,000
General overhead expenses 56,000
Show the work cost and the total cost of manufacture, the percentages that the works overheads bear to the direct
manual and machine labour cost and the percentage that the general overheads bear to the works cost.
What price should the company quote to manufacture a refrigerator which is estimated to require on expenditure
of Rs. 7,200 in materials and Rs. 6,000 in wages so that it will yield a profit of 20~ on the selling price?
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452

Solution:
Job Cost Sheet
Expenses Amount Amount
Rs. Rs.
Materials consumed 3,50,000
Direct labour cost 2,70,000
Direct expenses Nil
Prime cost (1) 6,20,000
Add : Factory or work overhead 81,000
Works cost (2) 7,01,000
Add : General overhead expenses 56,080
Total cost of production (3) 7,57,080
Percentage of works overhead on Direct Manual & Machine

81,000
Labour Cost x 100 = 30%
2,70,000

Percentage of general overhead on works cost

56,080
= 7,01,000
x 100 = 8%

Statement showing the quotation price for the refrigerator.

Expenses Amounts Amounts

Rs. Rs.
Materials 7,200
Wages 6,000
Direct Expenses -
Prime Cost (1) 13,200
Add : Works overheads

30% on wages [6,000 x ~] 1,800

100
Factory or works Cost (2) 15,000
Add : General overheads

8% on works cost [t5,OOO x ~] 1,200

100
Total cost of production 16,200
Profit 20% on selling price i.e.,
25% on total cost 4,050
Sales or quotation price 20,250
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Job, Batch and Process Costing
IUustration: 4
The following information for the year ended 31 sl December, 2003 is obtained from the cost books of
a factory:
Completed Job Work in Progress
Rs. Rs.
Raw materials supplied from stores 90,000 30,000
Chargeable expenses 10,000 4,000
Wages 1,00,000 40,000
Materials transferred to work-in-progress 2,000 2,000
Materials returned to stores 1,000
Factory overhead is 90% of wages and administration overhead 25% of factory cost.
The value of the executed contract during 2003 was Rs. 4,10,000.
You are required to prepare consolidated completed job account showing the profit and loss and consolidated
work-in-progress account.
Solution:
Consolidated Completed Job Account
Expenses Amount Amount
Rs. Rs.
Raw materials supplied from stores 90,000
Less: Materials transferred to WIP 2,000
Less: Materials returned to stores 1,000 87,000
Wages 1,00,000
Chargeable Expenses 10,000
Prime Cost (1) 1,97,000

;~
Add: Factory Overhead 90% of wages
[ 1,00,000 x ] 90,000

Works or Factory Cost (2) 2,87,000

Add: Administrative overhead 25% of factory cost 71,750

[ 2,87,000 x 12~ ]

Total cost of production (3) 3,58,750

Profit 51,250
Sales 4,10,000

Consolidated work-in-p~ogress Account

Expenses Amount Amount:
Rs. Rs.
Raw materials supplied 30,000
!
Add: Material transferred from completed jobs 2,000 32,000
Wages 40,000 .
Chargeable expenses 4,000
Prime cost 76,000
Factory overhead 90% of wages 36,000
Works or factory cost 1,12,000
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BATCH COSTING
Meanina
In Batch Costing, a lot of similar units which comprise the batch may be used as a cost unit for
ascertainment of cost. Separate Cost Sheet is maintained for each batch by assigning a batch number. Cost
per unit of product is determined by dividing the total cost of a batch by the number of units of that batch.
Batch costing is used in number drug industries, ready made garment industries, electronic components
manufacture, TV sets, radio etc.
Determination of Economic Batch Quantity (EBQ)
Determination of economic batch lot is the important work in batch costing. The two types of costs
involved in batch costing are (1) Set up cost and (2) Carrying cost.
If the batch size is increased. set up cost per unit will come down and the carrying cost will increase. It
the batch size is reduced. set up cost per unit will increase and the carrying cost will come down. Economic
Batch Quantity will balance these two opposing costs. EBQ is calculated by using the following formula:
Economic Batch Quantity (EBQ) = ~ 2~S

Where :
D = Annual Production or Demand in Units
S = Setup Cost per batch
C = Annual Holding or Carrying Cost per unit
DifTerence between Job Costing and Batch Costing

Job Costing Balch Costing

(I) Costs are collected and accumulated (I) Lot of similar units which comprise the batch may
according to Jobs, Contracts or Work Order. be used as a cost unit for ascertainment of cost.
(2) Each job is treated as a separate entity for (2) Separate cost sheet is maintained for each batch
the purpose of costing. by assigning a batch number.
(3) The materials and labour costs are complied (3) Separate cost sheet is maintained for each batch
through the respective abstracts and by assigning a batch manner.
overheads are charged on predetermined
basis.
(4) Costs are found out at the stage of (4) Cost per unit of product is determined by dividing
completion of the job. the total cost of a batch by the number of units
of that batch. ~
(5) Job costing is used in Printing, Furniture (5) Batch costing is used in drug industries, ready-
making, Ship Building etc. made garments, T.V. sets, Radio's and Electronic
Components Manufacture.

IlIustJIation: 5
Following information relates to the manufacturing of a component X - III in a cost centre :
Cost of materials 6 paise per component
Operator's wages 72 paise an hour
Machine hour Rs. 1.50
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Job, Batch and Process Costing
Setting. up time of the machine 2 hours and 20 minutes
Manufacturing time 10 minutes per component
Prepare cost sheets showing both production and setting up costs-total and per unit when a batch consists of
1,000 components.

Solution:
Cost Sheet for a Batch of 1000 Components
Particulars Amount Amount
Rs. Rs.
, Setting up Costs :
Operator's wages for 2 hrs and 20 mts @ 75 }
Paise an hour 1.68
Machine overheads for 2 hrs and 20 mts @ Rs.I.50 }
an hour 3.50
Total Setting up costs
0.005 5.18
Add: Production Costs :
Material cost for 1,000 units @ 6 paise per unit 0.060 60.00
Operator's wages for 10,000 Mts (100 x 10) @ 72 }
Paise an hour 0.120 120
Machine Overheads for 10,000 mts @ Rs.1.50 }
an hour 0.250 250
Total Production Costs 0.430 430
Total Costs 0.435 435.18
(Setting up Costs + Production Costs)

Illustration: 6
From the following information, you are required to calculate Economic Batch Quantity :
Annual demand for the product = 40,000 units
Setup cost per batch = Rs. 750
Carrying cost per unit annum = R~. 15

Solution:
Calculation Economic Batch Quantity :
Economic Batch Quantity =

Where:
D = Annual Demand in Units
S = Set up Cost per batch
C = Carrying Cost per unit per annum
Economic Batch Quantity =I 2 x 40,000 x 750
'.J 15
= 2,000 units
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456
Illustration: 7
A Ltd. is committed to supply 24,000 bearings per annum to B Ltd. on a steady basis. It is estimated that it costs
10 paise as inventory holding cost per bearing per month and that the set up cost per run of bearing manufacture is
Rs.324.
(1) What should be the optimum run size for bearing manufacture?
(2) What would be the interval between two consecutive optimum runs?
(3) Find out the minimum inventory cost per annum.
Solution:
(i) Economic Batch or run size :

EBQ= ~ 2~S

Where
D = Annual Demand or production in units
S = Setup cost per batch
C = Annual carrying or holding cost per unit
EBQ = -. I
2 x 24,000 x 324
V 12
= 3,600 units
Alternative Solution:
The Economic batch size figure can also be obtained by taking monthly figure as under:
= ~ 2 x 2000 units x Rs. 324
0.10
= 3,600 units
(ii) Number of set up per annum:

Annual production
=
Economic Batch Quantity
24,000 2 20
= = 6 or
3,600 3 3

12 12
Interval between two consecutive optimum runs --- = x3
20 20
3
= 1.8 months.
(iii) Minimum Inventory Cost Per Year :

= [ 24,000 3,600
x 12] = Rs. 2,160 + Rs. 2,160
3,600 2
= Rs. 4,320
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Operating Costing

Basic Concepts
Operating Costing It is a method of ascertaining costs of providing or operating
a service. This method of costing is applied by those
undertakings which provide services rather than production of
commodities.
Cost Units Transport service  Passenger km., quintal km., or tone-
km.
Supply service  Kw hr., Cubic metre, per kg., per litre.
Hospital  Patient per day, room per day or per
bed, per operation etc.
Canteen  Per item, per meal etc.
Cinema  Per ticket.
Composite units i.e. tonnes km., quintal km. etc. may be com-
puted in two ways.
Composite Units Two different units are composed into a single unit.
Examples are Passenger-km., Kilowatt-hour, Tonne-km. etc.
Absolute Tonne- This is a weighted average of distance travelled and weight
km. carried.
Commercial This is a simple average of weight carried multiplied by total
Tonne-km. distance travelled.
Round-trip Travelling to a destination and return back to the starting
point.

SECTION-A
Question-1
Explain briefly, what do you understand by Operating Costing. How are composite units computed?
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Operating Costing

Solution:
Operating Costing: It is method of ascertaining costs of providing or operating a service. This
method of costing is applied by those undertakings which provide services rather than production
of commodities. This method of costing is used by transport companies, gas and water works
departments, electricity supply companies, canteens, hospitals, theatres, schools etc.
Composite units may be computed in two ways:
(a) Absolute (weighted average) tones- km., quintal- km. etc.
(b) Commercial (simple average) tonnes- km., quintal-km. etc.
Absolute tonnes-km. are the sum total of tonnes-km. arrived at by multiplying various
distances by respective load quantities carried.
Commercial tonnes-km., are arrived at by multiplying total distance km., by average load quantity.
Question-2
What do you understand by Operating Costs? Describe its essential features and state where
it can be usefully implemented?
Solution:
Operating Costs are the costs incurred by undertakings which do not manufacture any product
but provide a service. Such undertakings for example are — Transport concerns, Gas
agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of
activities carried out by the service undertakings, the cost system used is obviously different
from that followed in manufacturing concerns.
The essential features of operating costs are as follows:
(1) The operating costs can be classified under three categories. For example in the case of
transport undertaking these three categories are as follows:
(a) Operating and running charges: It includes expenses of variable nature. For
example expenses on petrol, diesel, lubricating oil, and grease etc.
(b) Maintenance charges: These expenses are of semi-variable nature and includes the
cost of tyres and tubes, repairs and maintenance, spares and accessories,
overhaul, etc.
(c) Fixed or standing charges: These includes garage rent, insurance, road licence,
depreciation, interest on capital, salary of operating manager, etc.
(2) The cost unit used is composite like passenger-mile; Kilowatt-hour, etc.
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8.3 Cost Accounting

It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms of
distribution undertakings.
Question-3
Distinguish between Operating Costing and Operation Costing.
Solution:
Operating Costing: It is a method of costing applied by undertakings which provide service
rather than production of commodities. Like unit costing and process costing, operating
costing is thus a form of operation costing.
The emphasis under operating costing is on the ascertainment of cost of rendering services
rather than on the cost of manufacturing a product. It is applied by transport companies, gas
and water works, electricity supply companies, canteens, hospitals, theatres, school etc.
Within an organisation itself certain departments too are known as service departments which
provide ancillary services to the production departments. For example maintenance
department; power house, boiler house, canteen, hospital, internal transport etc.
Operation Costing: It represents a refinement of process costing. In this each operation
instead of each process of stage of production is separately costed. This may offer better
scope for control. At the end of each operation, the unit operation cost may be computed by
dividing the total operation cost by total output.

SECTION – B
Calculation of Absolute Tonne-Km and Commercial Tonne-Km.
Question 1
Calculate total passenger kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day
8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of
capacity utilization.
Solution:
Calculation of passenger kilometer:
= 6 buses  25 days  8 trips  2 sides  20 k.m.  40 passengers  80%
= 15,36,000 passenger km.
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Operating Costing

Question 2
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station
B and rest of goods at station C. It reaches back directly to station A after getting reloaded
with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to
A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute tonnes km.’ and
‘Commercial tones-km’.
Solution:
Absolute tonnes km.:
= Weight in tonnes × Distance in km.
= From A to B + from B to C + from C to A
= (24 tonnes × 270 km.) + (14 tons × 150 km.) + (18 tonnes × 325 km.)
= 6,480 tonnes-km. + 2,100 tonnes-km. + 5,850 tonnes-km.
= 14,430 tonnes-km.
Commercial Tonnes km.
= Average weight load × Total distance (km.) travelled
 24 14  18 
 
=  3  Tonnes × 745 km.
= 13,906.67 Tonnes km

Costing for Transport Agencies

Question 3
A Mineral is transported from two mines – 'A' and 'B' and unloaded at plots in a Railway
Station. Mine A is at a distance of 10 km., and B is at a distance of 15 km. from railhead plots.
A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral from the
mines. Records reveal that the lorries average a speed of 30 km. per hour, when running and
regularly take 10 minutes to unload at the railhead. At mine 'A' loading time averages 30
minutes per load while at mine 'B' loading time averages 20 minutes per load.
Drivers' wages, depreciation, insurance and taxes are found to cost ` 9 per hour operated.
Fuel, oil, tyres, repairs and maintenance cost ` 1.20 per km.
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each
mine.
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8.5 Cost Accounting

Solution:
Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine A (`) Mine B (`)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and taxes)
A: 1 hour 20 minutes @ ` 9 per hour 12.00
B: 1 hour 30 minutes @ ` 9 per hour 13.50
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
A: 20 km. ` 1.20 per km. 24.00
B: 30 km. ` 1.20 per km. 36.00
Total cost per trip 36.00 49.50
Cost per tonne – km 0.72 0.66
(Refer to working note 2)  `36   `49.50 
   
50 tonne  km  75 tonne  km 
   

Working notes
Mine- A Mine- B
(1) Total operated time taken per trip
Running time to & fro 40 minutes 60 minutes
 60 minutes   60minutes 
 20 km.   30 km. 
 30 km.   30 km. 
Un-loading time 10 minutes 10 minutes
Loading time 30 minutes 20 minutes
Total operated time 80 minutes or 90 minutes or
1 hour 20 minutes 1 hour 30 minutes
(2). Effective tones – km. 50 75
(5 tonnes × 10 km.) (5 tonnes × 15 km.)

Question 4
EPS is a Public School having 25 buses each plying in different directions for the transport of
its school students. In view of large number of students availing of the bus service, the buses
work two shifts daily both in the morning and in the afternoon. The buses are garaged in the
 Page 16

Operating Costing

school. The workload of the students has been so arranged that in the morning, the first trip
picks up senior students and the second trip plying an hour later picks up junior students.
Similarly, in the afternoon, the first trip takes the junior students and an hour later the second
trip takes the senior students home.
The distance travelled by each bus, one way is 16 km. The school works 24 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for the year 2013-2014 are as under:
Driver's salary – payable for all the 12 in months. ` 5,000 per month per driver.
Cleaner's salary payable for all the 12 months ` 3,000 per month per cleaner
(one cleaner has been employed for every five buses).
Licence Fees, Taxes etc. ` 2,300 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 16,400 per bus per annum
Purchase price of the bus ` 16,50,000 each
Life of the bus 16 years
Scrap value ` 1,50,000
Diesel Cost ` 18.50 per litre
Each bus gives an average of 10 km. per litre of diesel. The seating capacity of each bus is 60
students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance traveled as under:
Students picked up and Bus fee Percentage of students
dropped within the range of availing this facility
distance from the school
4 km. 25% of Full 15%
8 km. 50% of Full 30%
16 km. Full 55%
Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 km. from the school.
(b) Students coming from a distance of upto 8 km. from the school; and
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8.7 Cost Accounting

(c) Students coming from a distance of upto 16 km. from the school.
Solution:
(i) EPS Public School
Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus Fleet of 25 buses
per annum per annum
(`) (`)
Running costs : (A)
Diesel (Refer to working note 1) 56,832 14,20,800
Repairs & maintenance costs: (B) 16,400 4,10,000
Fixed charges:
Driver's salary 60,000 15,00,000
(` 5,000 × 12 months)
Cleaners salary 7,200 1,80,000
(`3,000 × 1/5th × 12 months)
Licence fee, taxes etc. 2,300 57,500
Insurance 15,600 3,90,000
Depreciation 93,750 23,43,750
Total fixed charges: (C) 1,78,850 44,71,250
Total expenses: (A+B+C) 2,52,082 63,02,050
(ii) Average cost per student per month in respect of students coming from a distance
of:
(a) 4 km. from the school{` 2,52,082 / (354 students × 12 months)} ` 59.34
(Refer to Working Note 2)
(b) 8 km. from the school (` 59.34 ×2) ` 118.68
(c) 16 km. from the school (` 59.34 × 4) ` 237.36

Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (16 km. × 2 trips) 32 km.
Distance traveled per day by a bus (32 km. × 4 shifts) 128 km.
Distance traveled during a month (128 km. × 24 days) 3,072 km.
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Operating Costing

Distance traveled per year (3,072 km. × 10 months) 30,720 km.

No. of litres of diesel required per bus per year 3,072 litres
(30,720 km. ÷ 10 km.)
Cost of diesel per bus per year (3,072 litres × ` 18.50) ` 56,832
2. Calculation of number of students per bus:
Bus capacity of 2 trips (60 students × 2 trips) 120 students
1/ th fare students (15% × 120 students) 18 students
4

½ fare 30% students (equivalent to 1/4th fare students) 72 students

Full fare 55% students (equivalent to 1/4th fare students) 264 students
Total 1/4th fare students 354 students

Question 5
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different
directions for transport of customer's goods. The trucks run loaded with goods and return
empty. The distance travelled, number of trips made and the load carried per day by each
truck are as under:
Truck No. One way No. of trips Load carried
Distance Km per day per trip / day tonnes
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two years is
as under
Year Total distance travelled Maintenance Cost `
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the year under review:
Diesel ` 10 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary ` 2,000 per month
Licence and taxes ` 5,000 per annum per truck
Insurance ` 5,000 per annum for all the three vehicles
 Page 19

8.9 Cost Accounting

Purchase Price per truck ` 3,00,000, Life 10 years. Scrap value at the end of life is
` 10,000.
Oil and sundries ` 25 per 100 km run.
General Overhead ` 11,084 per annum
The vehicles operate 24 days per month on an average.
Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight.
Solution:
(i) Annual Cost Statement of three vehicles
(`)
Diesel {(1,34,784 km. ÷ 4 km) × ` 10) (Refer to Working Note 1) 3,36,960
Oil & sundries {(1,34,784 km. ÷ 100 km.) × ` 25} 33,696
Maintenance {(1,34,784 km. × ` 0.25) + ` 6,000} 39,696
(Refer to Working Note 2)
Drivers' salary {(` 2,000 × 12 months) × 3 trucks} 72,000
Licence and taxes (` 5,000 × 3 trucks) 15,000
Insurance 5,000
Depreciation {(` 2,90,000 ÷ 10 years) × 3 trucks} 87,000
General overhead 11,084
Total annual cost 6,00,436
(ii) Cost per km. run
Totalannual cos t of vehicles
Cost per kilometer run = (Refer to Working Note 1)
Totalkilometre travelled annually

` 6,00,436
= ` 4.4548
1,34,784 Kms

(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Total annual cos t of three vehicles
Cost per tonne km. = (Refer to Working Note 1)
Total effective tonnes kms. per annum
 Page 20

Operating Costing

` 6,00,436
=  ` 1.143
5,25,312 kms
 ` 1.143 
Freight rate per tonne km.  0.9  1 = ` 1.27
 
Working Notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in one
year
Truck One way No. of Total Load Total
number distance in trips distance carried per effective
kms covered in trip / day tonnes km
km per day in tonnes
1 16 4 128 6 384
2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1,824

Total kilometre travelled by three trucks in one year

(468 km. × 24 days × 12 months) = 1,34,784
Total effective tonnes kilometre of load carried by three trucks during one year
(1,824 tonnes km. × 24 days × 12 months) = 5,25,312
2. Fixed and variable component of maintenance cost:
Difference in maintenanc e cost
Variable maintenance cost per km=
Difference in distance travelled
` 46,050 – ` 45,175
=
1,60,200 kms – 1,56,700 kms
= ` 0.25
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= ` 46,050 – 1,60,200 kms × ` 0.25 = ` 6,000
Question 6
A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
 Page 21

8.11 Cost Accounting

7 15 tonne
2 20 tonne
The company provides the goods transport service between stations ‘A’ to station ‘B’.
Distance between these stations is 200 kilometres. Each vehicle makes one round trip
per day an average. Vehicles are loaded with an average of 90 per cent of capacity at
the time of departure from station ‘A’ to station ‘B’ and at the time of return back loaded
with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
The following information are related to the month of October, 2013:
Salary of Transport Manager ` 30,000
Salary of 30 drivers ` 4,000 each driver
Wages of 25 Helpers ` 2,000 each helper
Wages of 20 Labourers ` 1,500 each labourer
Consumable stores ` 45,000
Insurance (Annual) ` 24,000
Road Licence (Annual) ` 60,000
Cost of Diesel per litre ` 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. ` 23,500
Cost of replacement of Tyres, Tubes, other parts etc. ` 1,25,000
Garage rent (Annual) ` 90,000
Transport Technical Service Charges ` 10,000
Electricity and Gas charges ` 5,000
Depreciation of vehicles ` 2,00,000
There is a workshop attached to transport department which repairs these vehicles and other
vehicles also. 40 per cent of transport manager’s salary is debited to the workshop. The
transport department is charged ` 28,000 for the service rendered by the workshop during
October, 2013. During the month of October, 2013 operation was 25 days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25
per cent on freight.
 Page 22

Operating Costing

Solution:
(i) Operating Cost Sheet for the month of October, 2013
Particulars Amount (`)
A. Fixed Charges:
Manager’s salary (` 30,000 × 60%) 18,000
Drivers’ Salary (` 4,000  30 drivers) 1,20,000
Helpers’ wages (` 2,000  25 helpers) 50,000
Labourer wages (` 1,500  20 labourers) 30,000
Insurance (` 24,000 ÷ 12 months) 2,000
Road licence (` 60,000 ÷ 12 months) 5,000
Garage rent (` 90,000 ÷ 12 months) 7,500
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000
Total (A) 2,70,500
B. Variable Charges:
Cost of diesel (Working Note 1) 12,60,000
Lubricant, Oil etc. 23,500
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A + B) 19,29,000
D. Total Ton-Kms. (Working Note 2) 18,86,400
E. Cost per ton-km. (C ÷ D) 1.022
(ii) Calculation of Chargeable Freight
Cost per ton-km. ` 1.022
Add: Profit @ 25% on freight or 33⅓% on cost ` 0.341
Chargeable freight per ton-km. ` 1.363 or ` 1.36
Working Notes:
1. Cost of Diesel:
Distance covered by each vehicle during October, 2013
 Page 23

8.13 Cost Accounting

= 200 k.m.  2  25 days  90 % = 9,000 km.

9,000k.m.  20 vehicles
Consumption of diesel =  36,000 litres.
5k.m.
Cost of diesel = 36,000 litres  ` 35 = ` 12,60,000.
2. Calculation of total ton-km:
Total Ton-Km. = Total Capacity  Distance covered by each vehicle  Average
Capacity Utilisation ratio.

=  5  9 ton   6 12ton   7 15 ton   2  20 ton 

90% 70%
 9,000k.m. 2
 45  72  105  40  9,000 k.m.  80%
= 262  9,000  80%.
= 18,86,400 ton-km.
Question 7
A transport company has been given a 40 kilometre long route to run 5 buses. The cost of
each bus is ` 6,50,000. The buses will make 3 round trips per day carrying on an average 80
percent passengers of their seating capacity. The seating capacity of each bus is 40
passengers. The buses will run on an average 25 days in a month. The other information for
the year 2013-14 are given below:
Garage rent ` 4,000 per month
Annual repairs and maintenance ` 22,500each bus
Salaries of 5 drivers ` 3,000 each per month
Wages of 5 conductors ` 1,200 each per month
Manager’s salary ` 7,500 per month
Road tax, permit fee, etc. ` 5,000 for a quarter
Office expenses ` 2,000 per month
Cost of diesel per litre ` 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost
You are required to calculate the bus fare to be charged from each passenger per kilometre, if the
company wants to earn profits of 331/3 percent on taking (total receipts from passengers).
 Page 24

Operating Costing

Solution:
Operating Cost Sheet for the year 2013- 14
Particulars Total Cost (`)
A. Fixed Charges:
Garage rent (`4,000 × 12 months) 48,000
Salary of drivers (`3,000 × 5 drivers ×12 months) 1,80,000
Wages of Conductors (`1,200 × 5 conductors × 12 months) 72,000
Manager’s salary (` 7,500 × 12 months) 90,000
Road Tax, Permit fee, etc. (` 5,000 × 4 quarters) 20,000
Office expenses (` 2,000 × 12 months) 24,000
Insurance (` 6,50,000 × 5 buses × 3%) 97,500
Total (A) 5,31,500
B. Variable Charges:
Repairs and Maintenance (` 22,500 × 5 buses) 1,12,500
Depreciation (` 6,50,000 × 5 buses × 15%) 4,87,500
Diesel {(3,60,000 km. ÷ 6 km.) × `33} 19,80,000
Total (B) 25,80,000
Total Cost (A+B) 31,11,500
Add: 33 1/
3 % Profit on takings or 50% on cost 15,55,750
Total Takings (Total bus fare collection) 46,67,250
Total Passenger-km. (Working Note 2) 1,15,20,000
Bus fare to be charged from each passenger per km. 0.405
Working Notes:
1. Total Kilometres to be run during the year 2013-14
= 40 km.× 2 sides × 3 trips × 25 days × 12 months × 5 buses = 3, 60,000 Kilometres
2. Total passenger Kilometres
= 3,60,000 km. × 40 passengers × 80% = 1,15,20,000 Passenger- km.
Question 8
The following information relates to a bus operator:
Cost of the bus ` 18,00,000
Insurance charges 3% p.a.
 Page 25

8.15 Cost Accounting

Manager-cum accountant's salary ` 8,000 p.m.

Annual Tax ` 50,000
Garage Rent ` 2,500 p.m.
Annual repair & maintenance ` 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ` 1,20,000
Driver's salary ` 15,000 p.m.
Conductor's salary ` 12,000 p.m.
Stationery ` 500 p.m.
Engine oil, lubricants (for 1200 km.) ` 2,500
Diesel and oil (for 10 km.) ` 52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 40 passengers in each trip.
Assume 15% profit on collections. The bus will work on the average 25 days in a month.
Calculate fare for passenger-km
Solution:
Working Notes:
(i) Calculation of Depreciation of Bus (Per month)
Cost of thebus  Scrapvalueat theendof the15 years
=
Expectedlife of thebus
`18,00,000  `1,20,000
=
15 years
= ` 1,12,000 p.a.
`1,12,000
Depreciation per month =  ` 9,333.33
12months
(ii) Calculation of total distance travelled and Passenger-km. per month
Total distance = 3 trips × 2 × 20 k.m. × 25 days = 3,000 k.m.
Total Passenger-km. = 3 trips × 2 × 20 k.m. × 25 days × 40 passengers
= 1,20,000 Passenger-k.m.
 Page 26

Operating Costing

(iii) Cost of Engine oil, Lubricants and Diesel & oil (Per month)
Totaldistance travelled
Engine oil & lubricants = × ` 2,500
1,200 K.m.
3,000K.m.
= × ` 2,500 = ` 6,250
1,200 K.m.
Totaldistance travelled
Diesel and Oil = × ` 52
10 K.m.
3,000K.m.
= × ` 52 = `15,600
10 K.m.
Statement showing the Operating Cost per Passenger-km.
(`) (`)
(i) Standing Charges:
Depreciation {Working Note- (i)} 9,333.33
 `18,00,000  4,500
Insurance Charge × 3% 
 
 12 
Manager-cum-accountant’s salary 8,000
 `50,000 
Annual Tax (p.m.)  4,166.67
 
 12 
Garage Rent 2,500 28,500
(ii) Maintenance Charges:
 `1,50,000 
Repair & Maintenance per month  12,500
 
 12 
(iii) Running Cost:
Driver’s Salary 15,000
Conductor’s Salary 12,000
Stationery 500
Engine oil & Lubricants {Working Note- (iii)} 6,250
Diesel and oil {Working Note- (iii)} 15,600
Total running cost before deducting commission to 49,350 49,350
driver and conductor
Total cost excluding commission to driver and
conductor 90,350
 Page 27

8.17 Cost Accounting

Driver’s commission on collection* 6,023.34

Conductor’s commission on collection* 6,023.33
Total Cost (i) +(ii) + (iii) 1,02,396.67
Add: Profit** 18,070
Total Collection 1,20,466.67
Working Note:
Total costs before commission on collection and net profit is ` 90,350.
Commission on collection to driver and conductor is 10% of collection and Profit is 15%
of collection means
100% - (10% + 15%) i.e. 75% = ` 90,350
`90,350
So, Total collection = ×100 = `1,20,466.67
75
*Total Commission on collection = 10% × ` 1,20,466.67 = ` 12,046.67
Driver’s share = 50% × ` 12,046.67 = 6,023.34
Conductor’s share = 50% × ` 12,046.67 = 6,023.33
** Profit on collection = ` 1,20,466.67 × 15% = ` 18,070
Total Collection
Fare per Passenger-km. =
Total Passenger - km. {Working Note(ii)}
`1,20,466.67
=
1,20,000
= ` 1.004 (appx.)

Question 9
Voyager Cabs Pvt. Ltd. is a New Delhi based cab renting company, provides cab facility on
rent for cities Delhi, Agra and Jaipur to the tourists. To attract more tourists it has launched a
new three days tour package for Delhi-Jaipur-Agra-Delhi. Following are the relevant
information regarding the package:
Distance between Delhi to Jaipur
274
(Km.)
Distance between Delhi to Agra (Km.) 242
Distance between Agra to Jaipur (Km.) 238
Price of diesel in Delhi ` 54 per litre
Price of diesel in Jaipur ` 56 per litre
 Page 28

Operating Costing

Price of diesel in Agra ` 58 per litre

Mileage of cab per litre of diesel (Km.) 16
Chauffeur’s salary ` 12,000 per month
Cost of the cab ` 12,00,000
Expected life of the cab 24,00,000 kms.
Servicing cost ` 30,000 after every 50,000 kilometres run.
Chauffeur’s meal allowance ` 50 for every 200 kilometres of completed journey
Other set up and office cost ` 2,400 per month.
Voyager Cabs has made tie-up with fuel service centres at Agra, Jaipur and Delhi to fill diesel
to its cabs on production of fuel passbook to the fuel centre. Company has a policy to get fuel
filled up sufficient to reach next destination only.
You are required to calculate the price inclusive of service tax @ 12.36% to be quoted for the
package if company wants to earn profit of 25% on its net takings i.e. excluding service tax.
Solution:
Calculation of Price of the Delhi-Jaipur-Agra-Delhi tour package
Particulars Amount (`) Amount (`)
Diesel Cost (Working Note-2) 2,635.00
 ` 30,000 
Servicing Cost  754kms. 
50,000kms  452.40
 
Chauffeur’s meal cost (three 200 km. completed journey × ` 50) 150.00
Other Allocable costs:
 `12,00,000 
Depreciation  754kms. 
24,00,000kms  377.00
 
 `2,400 
Other set-up and office cost  3days 
30days  240.00
 
 `12,000 
Chauffeur’s salary  3days 
30 days  1,200.00 1,817.00
 
Total Cost 5,054.40
Add: Profit (25% of net takings or 1/3rd of total cost) 1,684.80
6,739.20
Add: Service Tax @12.36% 832.97
Price of the package (inclusive of service tax) 7,572.17
 Page 29

8.19 Cost Accounting

Working Notes
(1) Total distance of journey
From To Distance (in Km.)
Delhi Jaipur 274
Jaipur Agra 238
Agra Delhi 242
Total Distance 754
(2) Cost of Diesel
Price of diesel per
From To Distance (in Km.) Total diesel Cost (`)
litre (`)
I II III IV V= (III ÷ 16 km) × IV
Delhi Jaipur 274 54 924.75
Jaipur Agra 238 56 833.00
Agra Delhi 242 58 877.25
Total cost 2,635.00

Question 10
Gopal Milk Co-Operative Society (GMCS) collects raw milk from the farmers of Ramgarh,
Pratapgarh and Devgarh panchayats and processes these milk to make various dairy
products. GMCS has its own vehicles (tankers) to collect and bring the milk to the processing
plant. Vehicles are parked in the GMCS’s garage situated within the plant compound.
Following are the some information related with the vehicles:
Ramgarh Pratapgarh Devgarh
No. of vehicles assigned 4 3 5
No. of trips a day 3 2 2
One way distance from the processing plant 24 k.m. 34 k.m. 16 k.m.
Toll tax paid p.m. (`) 2,850 3,020 ---
All the 5 vehicles assigned to Devgarh panchayat, were purchased five years back at a cost of
` 9,25,000 each. The 4 vehicles assigned to Ramgarh panchayat, were purchased two years
back at a cost of ` 11,02,000 each and the remaining vehicles assigned to Pratapgarh were
purchased last year at a cost of ` 13,12,000 each. With the purchase of each vehicle a two
years free servicing warranty is provided. A vehicle gives 10 kmpl mileage in the first two year
of purchase, 8 kmpl in next two years and 6 kmpl afterwards. The vehicles are subject to
depreciation of 10% p.a. on straight line basis irrespective of usage. A vehicle has the
 Page 30

Operating Costing 8.20

capacity to carry 25,000 litres of milk but on an average only 70% of the total capacity is
utilized.
The following expenditure is related with the vehicles:
Salary of Driver (a driver for each vehicle) ` 18,000 p.m.
Salary to Cleaner (a cleaner for each vehicle) ` 11,000 p.m.
Allocated garage parking fee ` 1,350 per vehicle per month
Servicing cost ` 3,000 for every complete 5,000 k.m. run.
Price of diesel per litre ` 58.00
From the above information you are required to calculate
(i) Total operating cost per month for each vehicle. (Take 30 days for the month)
(ii) Vehicle operating cost per litre of milk.
Solution:
(i) Calculation of Operating Cost per month for each vehicle
Ramgarh Pratapgarh Devgarh Total
A. Running Costs:
- Cost of diesel (Working 1,25,280 70,992 92,800 2,89,072
Note- 2)
- Servicing cost (Working 9,000 --- 3,000 12,000
Note- 3)
1,34,280 70,992 95,800 3,01,072
B. Fixed Costs:
- Salary to drivers 72,000 54,000 90,000 2,16,000
(4 drivers × (3 drivers × (5 drivers ×
` 18,000) ` 18,000) ` 18,000)
- Salary to cleaners 44,000 33,000 55,000 1,32,000
(4 cleaners × (3 cleaners × (5 cleaners ×
` 11,000) ` 11,000) ` 11,000)
- Allocated garage parking 5,400 4,050 6,750 16,200
fee (4 vehicles × (3 vehicles × (5 vehicles ×
` 1,350) ` 1,350) ` 1,350)
- Depreciation (Working 36,733 32,800 38,542 1,08,075
Note- 4)
- Toll tax passes 2,850 3,020 --- 5,870
 Page 31

8.21 Cost Accounting

1,60,983 1,26,870 1,90,292 4,78,145

Total [A + B] 2,95,263 1,97,862 2,86,092 7,79,217
Operating Cost per vehicle 73,815.75 65,954 57,218.40 64,934.75
(` 2,95,263 ÷ (` 1,97,862 ÷ (` 2,86,092 ÷ (` 7,79,217 ÷
4 vehicles) 3 vehicles) 5 vehicles) 12 vehicles)

(ii) Vehicle operating cost per litre of milk

TotalOperatingCost per month `7,79,217
= = ` 0.053
Totalmilk carried amonth 1,47,00,000Litres (WorkingNote  5)
Working Notes:
1. Distance covered by the vehicles in a month
Route Total Distance (in K.M.)
Ramgarh (4 vehicles × 3 trips × 2 × 24 km. × 30 days) 17,280
Pratapgarh (3 vehicles × 2 trips × 2 × 34 km. × 30 days) 12,240
Devgarh (5 vehicles × 2 trips × 2 × 16 km. × 30 days) 9,600
2. Cost of diesel consumption
Ramgarh Pratapgarh Devgarh
Total distance travelled (K.M.) 17,280 12,240 9,600
Mileage per litre of diesel 8 kmpl 10 kmpl 6 kmpl
Diesel consumption (Litre) 2,160 1,224 1,600
(17,280 ÷ 8) (12,240 ÷ 10) (9,600 ÷ 6)
Cost of diesel consumption @ ` 58 1,25,280 70,992 92,800
per litre (`)
3. Servicing Cost
Ramgarh Pratapgarh Devgarh
Total distance travelled (K.M.) 17,280 12,240 9,600
Covered under free service No Yes No
warranty
No. of services required 3 2 1
(17,280 k.m. ÷ (12,240 k.m. ÷ (9,600 k.m. ÷
5,000 k.m.) 5,000 k.m.) 5,000 k.m.)
Total Service Cost (`) 9,000 --- 3,000
(` 3,000 × 3) (` 3,000 × 1)
 Page 32

Operating Costing

4. Calculation of Depreciation
Ramgarh Pratapgarh Devgarh
No. of 4 3 5
vehicles
Cost of a 11,02,000 13,12,000 9,25,000
vehicle
Total Cost 44,08,000 39,36,000 46,25,000
of vehicles
Depreciation 36,733 32,800 38,542
per month  `44,08,00010%   `39,36,00010%   `46,25,00010% 
     
12 months  12months  12months 
     
5. Total volume of Milk Carried
Route Milk Qty. (Litre)
Ramgarh ( 25,000 ltr. × 0.7 × 4 vehicles × 3 trips × 30 days) 63,00,000
Pratapgarh (25,000 ltr. × 0.7 × 3 vehicles × 2 trips × 30 days) 31,50,000
Devgarh (25,000 ltr. × 0.7 × 5 vehicles × 2 trips × 30 days) 52,50,000
1,47,00,000

Question 11
A mini-bus, having a capacity of 32 passengers, operates between two places - 'A' and 'B'.
The distance between the place 'A' and place 'B' is 30 km. The bus makes 10 round trips in a
day for 25 days in a month. On an average, the occupancy ratio is 70% and is expected
throughout the year.
The details of other expenses are as under:
Amount (`)
Insurance 15,600 Per annum
Garage Rent 2,400 Per quarter
Road Tax 5,000 Per annum
Repairs 4,800 Per quarter
Salary of operating staff 7,200 Per month
Tyres and Tubes 3,600 Per quarter
Diesel: (one litre is consumed for every 5 km) 13 Per litre
Oil and Sundries 22 Per 100 km run
Depreciation 68,000 Per annum
 Page 33

8.23 Cost Accounting

Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit of 25%
on total taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger
kilometer and one way fare per passenger.
Solution:
Operating Cost Statement
Particulars Total Cost Per annum (`)
A. Fixed Charges:
Insurance 15,600
Garage rent (` 2,400 × 4 quarters) 9,600
Road Tax 5,000
Salary of operating staff (` 7,200 × 12 months) 86,400
Depreciation 68,000
Total (A) 1,84,600
B. Variable Charges:
Repairs (` 4,800 × 4 quarters) 19,200
Tyres and Tubes (` 3,600 × 4 quarters) 14,400
Diesel {(1,80,000 km. ÷ 5 km.) × `13} 4,68,000
Oil and Sundries {(1,80,000 km. ÷ 100 km.) × `22} 39,600
Total (B) 5,41,200
Total Operating Cost (A+B) 7,25,800
Add: Passenger tax (Refer to WN-1) 3,01,275
Add: Profit (Refer to WN-1) 3,42,359
Total takings 13,69,434
Calculation of Cost per passenger kilometre and one way fare per passenger:
TotalOperatingCost
Cost per Passenger-Km. =
TotalPassenger  Km.
` 7,25,800
= = ` 0.18
40,32,000Passenger  Km.
 Page 34

Operating Costing

TotalTakings
One way fare per passenger = 30Km.
TotalPassenger  Km.
` 13,69,434
= 30 km = ` 10.20
40,32,000Passenger  Km.

Working Notes:
1. Let total taking be X then Passenger tax and profit will be as follows:
X = ` 7,25,800 + 0.22 X + 0.25X
X – 0.47 X = ` 7,25,800
`7,25,800
X= = ` 13,69,434
0.53
Passenger tax = ` 13,69,434 × 0.22 = ` 3,01,275
Profit = ` 13,69,434 × 0.25 = ` 3,42,359
2. Total Kilometres to be run during the year
= 30 km.× 2 sides × 10 trips × 25 days × 12 months = 1,80,000 Kilometres
3. Total passenger Kilometres
= 1,80,000 km. × 32 passengers × 70% = 40,32,000 Passenger- km.

Costing for Airlines

Question 12
In order to develop tourism, ABCL airline has been given permit to operate three flights in a week
between X and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The
normal occupancy is estimated at 60% through out the year of 52 weeks. The one-way fare is `
7,200. The cost of operation of flights are:
Fuel cost (variable) ` 96,000 per flight
Food served on board on non-chargeable basis ` 125 per passenger
Commission 5% of fare applicable for all booking
Fixed cost:
Aircraft lease ` 3,50,000 per flight
Landing Charges ` 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
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8.25 Cost Accounting

(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the
fare is reduced to ` 6,720. Advise whether this proposal should be implemented or not.
Solution:
(i) No. of passengers 160 seats  60% = 96
(`) (`)
Fare collection (96 passengers  `7,200) 6,91,200
Variable costs:
Fuel 96,000
Food (96 passengers  `125) 12,000
Commission (5% of `6,91,200) 34,560 1,42,560
Contribution per flight 5,48,640
Fixed costs:
Aircraft Lease 3,50,000
Landing charges 72,000 4,22,000
Net income per flight 1,26,640
(ii)
Fare collection (108 passengers  ` 6,720) 7,25,760
Variable costs:
Fuel 96,000
Food (108 passengers  `125) 13,500
Commission (5% of ` 7,25,760) 36,288 1,45,788
Contribution 5,79,972
There is an increase in contribution by ` 31,332. Hence the proposal is acceptable.

Costing for Clubs and Library

Question 13
A Club runs a library for its members. As part of club policy, an annual subsidy of upto ` 5 per
member including cost of books may be given from the general funds of the club. The management
of the club has provided the following figures for its library department.
Number of Club members 5,000
Number of Library members 1,000
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Operating Costing

Library fee per member per month ` 100

Fine for late return of books ` 1 per book per day
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 days
Number of available old books 50,000 books
Cost of new books ` 300 per book
Number of books purchased per year 1,200 books
Cost of maintenance per old book per year ` 10

Staff details No. Per Employee Salary per month (`)

Librarian 01 10,000
Assistant Librarian 03 7,000
Clerk 01 4,000
You are required to calculate:
(i) the cost of maintaining the library per year excluding the cost of new books;
(ii) the cost incurred per member per month on the library excluding cost of new books; and
(iii) the net income from the library per year.
If the club follows a policy that all new books must be purchased out of library revenue
(a) What is the maximum number of books that can be purchased per year and
(b) How many excess books are being purchased by the library per year?
Also, comment on the subsidy policy of the club
Solution:
(`) (`)
Total Revenue
Library fees per month (1,000 members × `100) 1,00,000
Late fees per month (500 times  5 books  `1) 2,500
Total Revenue per month 1,02,500
Total Revenue per annum (` 1,02,500  12 months) 12,30,000
Total Cost
Staff Costs:
Librarian (`10,000 × 1 person × 12 months) 1,20,000
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8.27 Cost Accounting

Assistant Librarian (` 7,000 × 3 persons × 12 months) 2,52,000

Clerk (` 4,000 × 1 person × 12 months) 48,000 4,20,000
Books maintenance cost (50,000 books × ` 10) 5,00,000
Total maintenance cost per annum excluding cost of new books 9,20,000
Cost incurred per library member per annum (` 9,20,000 ÷1,000) 920
Cost incurred per library member per month on the library
excluding cost of new books (` 920 ÷12 months) 76.67
Cost incurred per club member per annum (` 9,20,000 ÷ 5,000) 184
Cost incurred per club member per month (`184 ÷12 months) 15.33
Net income from the library per annum
(` 12,30,000 – ` 9,20,000) 3,10,000
Cost per new book 300
Maximum number of new books per annum (` 3,10,000 ÷ `300) 1,033.33 nos.
Number of books purchased 1,200 nos.
Excess books purchased (1,200 nos. – 1,033.33 nos.) 166.67 nos.
Subsidy being given per annum on excess purchase 50,000
(166.67 books × ` 300)
Subsidy per library member per annum (` 50,000 ÷1,000 members) 50
Subsidy per club member per annum (` 50,000 ÷ 5,000 members) 10
Comment: The club is exceeding its subsidy target to members by ` 45 (` 50 – `5) per library
member and ` 5 (` 10 – 5) per club member.

Costing for Hotels & Lodges

Question 14
A company runs a holiday home. For this purpose, it has hired a building at a rent of ` 10,000
per month alongwith 5% of total taking. It has three types of suites for its customers, viz.,
single room, double rooms and triple rooms.
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
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Operating Costing

The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of
triple rooms suite as twice of the double rooms suite.
The other expenses for the year 2013 are as follows:
(`)
Staff salaries 14,25,000
Room attendants’ wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to calculate the rent to be charged for each type of suite.
Solution:
(i) Total equivalent single room suites
Nature of suite Occupancy (Room-days) Equivalent single room
suites (Room-days)
Single room suites 36,000 36,000
(100 rooms  360 days  100%) (36,000  1)
Double rooms suites 14,400 36,000
(50 rooms  360 days  80%) (14,400  2.5)
Triple rooms suites 6,480 32,400
(30 rooms  360 days  60%) (6,480  5)
1,04,400

(ii) Statement of total cost:

(`)
Staff salaries 14,25,000
Room attendant’s wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
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8.29 Cost Accounting

Sundries 1,53,000
25,21,000
Building rent {(`10,000  12 months) + 5% on total taking} 1,20,000+ 5% on total
takings
Total cost 26,41,000 + 5% on total
takings

Profit is 20% of total takings

 Total takings = ` 26,41,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,000 + 0.25 × 1,04,400 x
Or, 1,04,400 x = 26,41,000 + 26,100 x
Or, 78,300 x = 26,41,000
Or, x = 33.73
(iii) Rent to be charged for single room suite = ` 33.73
Rent for double rooms suites ` 33.73  2.5 = ` 84.325
Rent for triple rooms suites ` 33.73  5 = ` 168.65
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2.2 ACTIVITY BASED COSTING

(f) It provides no information useful in either identifying productivity improve-

ment opportunities or determining if productivity improvement efforts
have yielded significant results. Indeed, often traditional costing system
indicates higher cost in the presence of known productivity improvement
or vice versa.

ACTIVITY BASED COSTING

Definition:
According to CIMA Official Terminology, Activity Based Costing is ‘An approach
to the costing and monitoring of activities which involves tracing resource con-
sumption and costing final outputs. Resources are assigned to activities, and
activities to cost objects based on consumption estimates. The latter utilize cost
drivers to attach activity costs to outputs.’
Meaning of Activities:
Activities comprise of units of work or tasks. For example, purchase of materials
is an activity consisting a series of tasks like purchase requisition, advertisement
inviting quotations, identification of suppliers, placement of purchase order,
follow-up, etc.
1. Value Added Activities (VA):
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u These are activities necessary for the performance of the process.

u These represent work that is valued by the external or internal customer.
u They improve the quality or function of a product. Hence, the customers
are usually willing to pay for the service.
u VA activities result in ‘Cost’ and not in losses.
u Example: Making product more versatile for certain other uses.
2. Non-Value Added Activities (NVA):
u These are additional and extraneous activities, not fully necessary for the
performance of the process.
u These represent work that is not valued by the external or internal customer.
u NVA activities do not improve the quality or function of a product or service
but they can adversely affect costs and prices.
u NVA activities create waste, result in delay of some sort, add cost to the
products or services for which the customer is not willing to pay.
u Example: Moving materials and machine set up for a production run.
Steps in ABC System:
1. To identify the different activities within the organisation:
Usually, the number of cost centres that a traditional overhead system uses is quite
small, say up to 15. In ABC the number of activities will be much more, say 200
the number will depend on how the management sub-divides the organisation’s
activities. It is possible to break the organisation down into many very small
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ACTIVITY BASED COSTING

activities, but if ABC is to be an acceptable and practical system it is necessary to

use larger groupings, so that, say, 40 activities may be used in practice.
2. To determine what causes the cost of each activity:
The cost driver (e.g. machine hours; number of dispatch orders).
3. To calculate the total cost for each activity:
The cost pool (e.g. total machining costs; total costs of dispatch department).
4. To calculate an overhead absorption rate for each cost driver.
5. Activity Cost Driver Rate = Total Cost of an Activity/Cost Driver.
6. To calculate the total overhead cost for each product manufactured.
7. To calculate the overhead cost per unit for each product.
Applications of ABC:
(a) When an ABC analysis is combined with a review of investment costs
for various tactical or strategic options, one can determine the return on
investment to be expected for each of the investment options.
(b) An ABC system can accumulate all of the costs associated with a particular
distribution method, which allows managers to compare this cost to the
profit margins earned on sales of products that are sold through it.

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(c) An ABC analysis will itemize the costs of each plant, and correctly allocate
these costs to the activities conducted within them, which allows a
company to determine which plants are more efficient than others.
(d) An ABC analysis includes all activity costs associated with a manufactured
item, which yields a comprehensive view of all costs associated with it, and
which can then be more easily compared with the cost of a similar item
that is purchased.
(e) By using internal ABC analyses to determine the cost of various activities, a
company can create a benchmark for what these costs should be in potential
acquisition targets. If the targets have higher costs than the benchmark
levels, then the acquiring company knows that it can strip out costs from
the acquisition candidate by improving its processes, which may justify
the cost of the acquisition.
(f) An ABC analysis can reveal the cost of each activity within an organisation.
The system is really designed to trace the costs of only the most significant
activities, but its design can be altered to itemize the costs of many more
activities. This information can then be used to determine which activities
are so expensive that they will be the main focus of management attention,
or which can be profitably combined with other activities through process
centering. This is a primary cost-reduction activity.
(g) An ABC analysis reveals all of the costs associated with a product, and
so is useful for determining the minimum price that should be charged.
However, the actual price charged may be much higher, since this may be
driven by the ability of the market to absorb a higher price, rather than
the underlying cost of a product.
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ACTIVITY BASED COSTING

(h) An ABC analysis can be combined with product prices to yield a list of
margins for each product sold. When sorted by market, product line, or
customer, it is easy to see which products have low or negative returns, or
which yield such low margin volume that they are not worth keeping.
(i) An ABC analysis reveals the cost of anything that a management team
needs to know about—activities, products, or customers—which can then
be sorted to see where the highest-cost items are located. When combined
with a value analysis, one can determine what costs return the lowest val-
ues, and structure a cost-reduction effort accordingly.
(j) An ABC analysis can itemize the costs that are specific to each customer,
such as special customer service or packaging issues, as well as increased
levels of warranty claims or product returns. When added to the margins
on products sold to customers, this reveals which customers are the most
profitable after all costs are considered.
Merits of ABC:
(a) ABC recognizes the increased complexity of modern businesses with its
multiple cost drivers, many of which are transaction based rather than
volume based.
(b) ABC is concerned with all overhead costs, including such ‘non-factory
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floor’ costs as quality control and customer service, and so it takes cost
accounting beyond its ‘traditional’ factory floor boundaries.
(c) ABC gives a meaningful analysis of costs which should provide a suitable
basis for decisions about pricing, product mix, design and production.
(d) ABC helps with cost reduction because it provides an insight into causal
activities and allows organisations to consider the possibility of outsourcing
particular activities, or even of moving to different areas in the industry
value chain.
(e) ABC can be used in conjunction with Customer Profitability Analysis
(CPA) to determine more accurately the profit earned by serving particular
customers.
(f) ABC can be used by service and retail organisations. Many service and
retail businesses have characteristics very similar to those required for the
successful application of ABC in modern manufacturing industry.
Demerits of ABC:
(a) The cost of obtaining and interpreting the new information may be con-
siderable. ABC should not be introduced unless it can provide additional
information for management to use in planning or control decisions.
(b) Some arbitrary cost apportionment may still be required at the cost
pooling stage for items like rent, rates and building depreciation. If an
ABC system has many cost pools, the amount of apportionment needed
may be greater than ever.
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ACTIVITY BASED COSTING

(c) Many overheads relate neither to volume nor to complexity. The ability
of a single cost driver to fully explain the cost behaviour of all items in its
associated pool is questionable.
(d) There will have to be a trade-off between accuracy, the number of cost
drivers and complexity.
(e) ABC tends to burden low-volume (new) products with a punitive lev-
el of overhead costs and hence threatens opportunities for successful
innovation if it is used without due care.
(f) Some people have questioned the fundamental assumption that activities
cause cost; they suggest that decisions cause cost or the passage of time
causes cost or that there may be no clear cause of cost.
Use of ABC in Decision Making:
(a) For decisions like relocation or opening of a new distribution center,
reduction in freight or other logistics costs can offset the expense of a
new facility, staff or equipment. ABC system can identify the specific cost
elements being targeted, providing a much clearer picture according to
which management can decide and act accordingly.
(b) ABC is a complement to Total Quality Management (TQM) and it provides
quantitative data that can track the financial impact of improvements

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implemented as part of the TQM initiative.
(c) Using traditional absorption system, overheads may get distributed equally
across all product lines. ABC system traces the costs back to the activity and
the consumption of resources by each product. This helps in analysing the
costs and profits of existing and new products in a more realistic manner.
(d) ABC can augment decision support for human resources. ABC can present
a number of options, including outsourcing, productivity improvements
through automation and determination of employee/revenue ratios.

AREAS IN WHICH ACTIVITY BASED INFORMATION IS USED FOR DECI-

SION MAKING
Product line profitability
Capital Investment decisions
Transfer Pricing
Pricing of products
Market Segmentation and Distribution Channels
Make-or-Buy decisions and outsourcing
Plant shut-down decisions
Evaluation of off-shore production, etc.

COST POOLS
Cost pools are commonly used for the allocation of factory overhead to units of
production, as required by several accounting frameworks. They are also used
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ACTIVITY BASED COSTING

in activity-based costing to allocate costs to activities. A business that wants to

allocate costs at a highly-refined level may choose to do so using a number of
cost pools.
The various Cost Pools may be as under in a manufacturing company:
a. Purchasing Department
b. Receiving Department
c. Material Handling
d. Set-up of Machines
e. Inspection and Quality Control
f. Research and Developments
g. Customer Service
h. Production Control

COST DRIVER
It is a factor that causes a change in the cost of an activity.
Categories of cost driver:
1. Resource Cost Driver:
TAXMANN®

It is a measure of the quantity of resources consumed by an activity. It is

used to assign the cost of a resource to an activity or cost pool.
For example, number of purchase orders placed will influence the cost of
materials to be purchased.
2. Activity Cost Driver:
It is a measure of the frequency and intensity of demand, placed on activities
by cost objects. It is used to assign activity costs to cost objects. Activity cost
drivers can be transaction drivers (e.g. No. of purchase orders processed,
no. of customer orders processed, etc.) as well as duration drivers (it rep-
resent amount of time required to perform an activity e.g. Setup hours,
inspection hours, etc.)
3. Volume Based Cost Drivers:
They assume that a product’s consumption of overhead is directly related
to units produced i.e. in case of Machine hours, if volume is increased by
10%, machine hours will increase by 10% hence energy cost will increase
by 10%.
4. Non-volume Based Cost Drivers:
They are in contrast of volume based cost drivers. Non-volume based
activities are not performed each time a unit of the product or service is
produced e.g. number of production runs for production scheduling & the
number of purchase orders for the purchasing activity.
Some Cost Drivers that are used in the context of Activity Based Costing:
Number of requisitions rose
Number of machine set-up
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ACTIVITY BASED COSTING

Number of machine hours

Number of production runs
Number of processed orders
Number of purchase orders
Number of orders completed
Number of labour hours
Number of orders packed and delivered
Number of inspections
Number of customers visit, etc.

COST OBJECT
It is an item for which cost ascertainment is required. For example, a product, a
service, a job, a work order No. or a customer, etc.

Past Examination Questions

OBJECTIVE QUESTIONS

TAXMANN®
Q.1 A company manufactures two products using common handling facility.
The total budgeted material handling cost is ` 60,000. Other details are:

Particulars Product A Product B

Number of units produced 30 30
Material moves per product line 5 15
Under Activity Based Costing System, material handling cost to be allocated
to Product A per unit is
(A) ` 1,000 (B) ` 1,500 (C) ` 500 (D) ` 2,500. [Dec. 2014, 2 Marks]
Ans. (C) ` 500
Working Note:
Total move in material handling = 5 + 15 = 20
Percentage move for Product A = 5/20 = 25%
Material handling cost to be allocated to Product A = ` 60,000 × 25% = ` 15,000
Therefore, per unit = ` 15,000 ÷ 30 units = ` 500.
Q.2 Activity Based Costing is a traditional method of charging overhead.
(True/False) [Dec. 2014, 1 Mark]
Ans. False
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ACTIVITY BASED COSTING

Q.3 RTM Ltd., using Activity Based Costing (ABC), manufactures two types
of products P and Q respectively. During a period, the company incurred
` 50,000 as inspection cost and it worked for 10 and 15 production runs re-
spectively for producing products P and Q. The inspection cost for product
P under ABC system was:
(A) ` 20,000
(B) ` 30,000
(C) ` 40,000
(D) None of the above [July 2023, 1 Mark]
Ans. (A) ` 20,000
Working Note:
Inspection Cost per run = 50,000/ 25 = ` 2,000.
Inspection cost for P = 2,000 × 10 = ` 20,000.

Q.4 The term, _______ is used to describe a location to which overhead costs
are initially assigned.
(A) Cost driver
(B) Cost pool
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(C) Activity
(D) Cost objects [July 2023, 1 Mark]
Ans. (B) Cost pool

Q.5 In Activity Based Costing, the allocation basis used for applying costs
to services or products is called ________. [July 2023, 1 Mark]
Ans. Cost Drivers

THEORY QUESTIONS

Q.1 Write a short note on the Activity based Costing System.

 [June 2013, 5 Marks]
Ans. Activity Based Costing (ABC) System:
u Activities in a process are identified and analysed. It may be a production or
a service.
u The process of making the product or rendering the service is broken down
into smaller activities for analysis and elimination of wasteful and non-value
added activities.
u The point of focus for the costs relating to an activity is called an activity
pool. It may consist of different cost elements. All cost elements assigned to
an activity is called an activity pool.
u Factors that determine the cost of an activity or the resources consumed,
varying which the level of activity itself varies are called activity cost drivers.
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ACTIVITY BASED COSTING

u The cost pool is analysed according to the cost drivers and the cost of the
activity is done as per the resources consumed. The more detailed the break-
up, the greater the accuracy of the cost of the activity.
u But depending on the cost and benefit arising out of such detailed analysis,
the level of detail required is determined.
Q.2 Outline the steps involved in Activity Based Costing.
 [Dec. 2014, 5 Marks]
Ans. Outline of the steps involved in ABC System:
(i) To study the manufacturing process and various stages involved in the product
or service to identify the activities involved.
(ii) To ascertain the resources and cost of each activity.
(iii) Tracing each cost with the cost objects.
(iv) Ascertaining the cost driver rate of each activity considering the cost of such
activity and the related cost driver.
(v) Applying the cost driver rates to the product.

PRACTICAL PROBLEMS

Q.1 Bright Engineering Co. Ltd. manufactures two products X & Y in its

TAXMANN®
factory, similar raw material and similar production processes are involved
in their production. The following particulars are given for the year 2012.
X Y
No. of units produced 10,000 15,000
No. of orders (total) 30 120
No. of Labour Hours per unit 2 4
Set-ups in the year 20 80
Machine hour per unit 6 2

The Co. incurred total over heads of ` 11,60,000 during the year. These
overheads have been related to Machine activity, set-ups activity and Handling
orders activity to the extent of ` 9,00,000, ` 80,000 and ` 1,80,000 respectively.
You are required to calculate the overhead absorption rate for both the
products using Traditional Costing method and the Activity Based Costing
method. [Dec. 2013, 10 Marks]
Ans. Statements showing Overhead rate of different products assuming
absorption of overhead on a Labour Hour Rate basis (`)
Particulars X Y
Output (units) 10,000 15,000
Labour hours per unit 2 4
Total Labour Hours 20,000 60,000
Overheads per unit @ ` 14.50 per labour hour 29 58
Overhead rate = 11,60,000/80,000 = ` 14.50 per labour hour
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ACTIVITY BASED COSTING

Statement Showing calculation of overhead rate per unit of cost driver

Total Overheads ` Drivers No. Cost per unit of Driver
Machine Activity 9,00,000 Machine hours 90,000 9,00,000/90,000 10
Set-up Activity 80,000 No. of set-ups 100 80,000/100 800
Handling orders 1,80,000 No. of orders 150 1,80,000/150 1,200
Total Cost 11,60,000
Total Machine hours = (10,000×6) + (15,000×2) = 90,000
Statement showing Overhead rate of each product
assuming activity-based costing  (`)
Particulars X Y
Output (units) 10,000 15,000
Machine Activity @ ` 10 per Machine hour 6,00,000 3,00,000
Set-up Activity @ ` 800 per set-up 16,000 64,000
Handling orders @ ` 1,200 per order 36,000 1,44,000
Total Cost 6,52,000 5,08,000
Overhead per unit 65.20 33.87
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Q.2 The following information provides details of costs, volumes and cost
drivers for a particular period in respect of AKASH INDUSTRIES LTD. for
the products X, Y and Z:
Product X Product Y Product Z Total
Production and sales (units) 30,000 20,000 8,000
Raw material usage (units) 5 5 11
Direct material cost (`) 25 20 11 12,38,000
Direct Labour hours 4/3 2 1 88,000
Machine hours 4/3 1 2 76,000
Direct labour cost per unit (`) 8 12 6
No. of production runs 3 7 20 30
No. of deliveries 9 3 20 32
No. of receipts (2×7) * 15 35 220 270
No. of production orders 15 10 25 50

*The company operates a just-in-time inventory policy and receives each

component once per production run.
Overhead Costs (`)
Setup 30,000
Machines 7,60,000
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ACTIVITY BASED COSTING

(`)
Receiving 4,35,000
Packing 2,50,000
Engineering 3,73,000
18,48,000
In the past, the company has allocated overheads to products on the basis
of direct labour hours. However, the majority of overheads are related to
machine hours rather than direct labour hours. The company has recently
redesigned its costing system by recovering overheads using two volume-
related bases: machine hours and a materials handling overhead rate for
recovering overheads of the receiving department.
Both the current and the previous cost systems reported low profit margins
for Product X, which is the company’s highest-selling product.
The cost accountant has recently attended a seminar/workshop on Activity
Based Costing and the overhead costs for the last period have been analysed
by the major activities in order to compute activity-based costs.
Required:
(i) Compute the product costs using a traditional volume-related costing

TAXMANN®
system based on the assumption that:
(A) all overheads are recovered on the basis of direct labour hours
(i.e. the company’s past product costing system); and
(B) the overheads of the receiving department are recovered by a
materials handling overhead rate and the remaining overheads
are recovered using a machine hour rate (i.e. the company’s
current costing system).
(ii) Compute product costs using an Activity Based Costing System.
 [Dec. 2013, 12 Marks]
Ans. Statements showing total cost of different products assuming absorption
of overhead on a Labour Hour Rate basis (`)
Particulars X Y Z
Direct Material 25 20 11
Direct Labour 8 12 6
Overheads @ ` 21 per Labour hour 28 42 21
Total Cost per unit 61 74 38
Overhead rate = 18,48,000/88,000 = ` 21 per Labour hour
Statements showing total cost of different products assuming absorption of
receiving department overhead based on material handling rate and remaining
overheads on a Machine Hour Rate basis (`)
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ACTIVITY BASED COSTING

Particulars X Y Z
Direct Material 25 20 11
Direct Labour 8 12 6
Receiving Department overheads @ 35.14% 8.79 7.03 3.87
on Material Cost
Remaining overheads @ ` 18.59 per machine 24.79 18.59 37.18
hour
Total Cost per unit 66.57 57.62 58.05
Material handling rate = 4,35,000/12,38,000 = 35.14% of Material Cost
Machine hour rate = 14,13,000/76,000 = ` 18.59 per hour
Statement Showing calculation of overhead rate per unit of cost driver
Total ` Drivers No. Cost per unit of Driver
Overheads
Set-up 30,000 No. of production runs 30 30,000/30 1,000
Machines 7,60,000 No. of machine hours 76,000 7,60,000/76,000 10
Receiving 4,35,000 No. of receipts 270 4,35,000/270 1,611
Packing 2,50,000 No. of deliveries 32 2,50,000/32 7,813
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Engineering 3,73,000 No. of production 50 3,73,000/50 7,460

orders
Total Cost 18,48,000

Statement showing total cost of each product

assuming activity-based costing (`)
Particulars A B C
Direct Material 25 20 11
Direct Labour 8 12 6
Overheads:
Set-up @ ` 1,000 per production run 0.10 0.35 2.50
Machines @ ` 10 per machine hour 13.33 10 20
Receiving @ ` 1,611 per receipt 0.81 2.82 44.30
Packing @ ` 7,813 per deliveries 2.34 1.17 19.53
Engineering @ ` 7,460 per production order 3.73 3.73 23.31
Total cost per unit 53.31 50.07 126.64
Overhead per unit of product in case of ABC costing
= Cost per unit of cost driver × No. of units of cost driver for the product/No. of
units of product
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ACTIVITY BASED COSTING

Q.3 MAGATRON LTD. produces and sells four products A, B, C and D.

Details of the four products and relevant information are given below for
week ended March 29, 2014:
Products A B C D
Output (units) 120 100 80 120
Cost per unit (`)
Direct Material 40 50 30 60
Direct Labour 28 21 14 21
Machine-hours (per unit) 4 3 2 3
The four products are similar and are usually produced in production runs
of 20 units and sold in batches of 10 units.
The production overheads during the period are as follows:
Particulars `
Factory works expenses 20,860
Set up costs 10,500
Stores receiving 7,200
Inspection/Quality control 4,200

TAXMANN®
Material handling and dispatch 9,240
The production overhead is currently absorbed by using a Machine-hour
rate and the company wishes to introduce Activity Based Costing (ABC)
system and has identified major cost pools for production overheads and
their associated cost drivers.
Information in these activity cost pools and their drivers is given below:
Activity Cost Pools Cost Drivers
Factory Works Expenses Machine-hours
Set up costs Number of production runs
Stores receiving Requisition raised
Inspection/Quality Control Number of production runs
Material handling & dispatch Number of orders executed
The number of requisitions-raised on the stores was 20 for each product
and number of orders executed was 42, each order being for a batch of 10
of a product.
Requirements:
(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 Based Costing.
(iii) Show the differences between (i) and (ii) and Comment.
 [June 2014, 12 Marks]