46

Activity Based Costing

MAY – 2023 – 5 Marks
Beta Limited produces 50,000 units, 45,000 units and 62,000 units of product ‘A’, ‘B’ and ‘C’
respectively. At present the company follows absorption costing method and absorbs overhead on
the basis of direct labour hours. Now, the company wants to adopt Activity Based Costing.

The information provided by Beta Limited is follows:

Product A Product B Product C
Floor space occupied 5,000 Sq. Ft. 4,500 Sq. Ft. 6,200 Sq. Ft.
Direct Labour Hours 7,500 Hours 7,200 Hours 7,800 Hours
Direct Machine Hours 6,000 Hours 4,500 Hours 4,560 Hours
Power consumption 32% 28% 40%
Overhead for the year are as follows:
`
Rent & Taxes 8,63,500
Electricity Expenses 10,66,475
Indirect labour 13,16,475
Repair & Maintenance 1,28,775
33,75,000
Required:
(i) Calculate the overhead rate per labour hour under Absorption Costing
(ii) Prepare a cost statement showing overhead cost per unit for each product – ‘A’, ‘B’ and ‘C’
as per Activity Based Costing

Solution
O<G7F <L?>Q?769 %%,*',&&&
(i) Overhead rate per hour = O<G7F Q<K>9 = "",'&& = `150 per hour

(ii) Statement showing overhead cost per unit as per Activity Based Costing
Overheads Cost driver Total (`) Product A Product B Product C
(` ) (`) (` )
Rates & Floor space 8,63,500 75,000 2,47,500 3,41,000
Taxes (50:45:62)
Electricity Power 10,66,475 3,41,272 2,98,613 4,26,590
consumption
(32:28:40)
Indirect Labour hours 13,16,250 4,38,750 4,21,200 4,56,300
labour (75:72:78)
Repair & Machine 1,28,775 51,000 38,250 39,525
Maintenance hours
(600:450:465)
Total cost 33,75,000 11,06,022 10,05,563 12,63,415
Units 50,000 45,000 62,000
Cost per unit 22.12 22.35 20.38

NOV – 2022 – 10 Marks

XYZ Ltd. is engaged in manufacturing two products – Express Coffee and Instant coffee. It
furnishes the following data for a year:

Sunil Keswani PYQs of Cost & Management Accounting

 47

Product Actual output Total Machine Total Number of Total number

(units) hours purchase orders of set ups
Express Coffee 5,000 20,000 160 20
Instant Coffee 60,000 1,20,000 384 44
The annual overheads are as under:
Particulars `
Machine Processing costs 7,00,000
Set up related costs 7,68,000
Purchase related costs 6,80,000
You are required to:
(i) Compute the costs allocated to each product – Express Coffee and Instant Coffee from each
activity on the basis of Activity Based costing (ABC) method.
(ii) Find out the Overhead cost per unit of each product – Express coffee and Instant coffee based
on (i) above.

Solution
Estimation of Cost-Driver Rate
Activity Overhead Cost (`) Cost-Driver level Cost Driver Rate
(`)
Machine Processing 7,00,000 1,40,000 machine 5
hours
Set-up Costs 7,68,000 64 Set-ups 12,000
Purchase related costs 6,80,000 544 purchase order 1,250

(i) & (ii) Cost Allocation under Activity Based Costing

Particulars Express Coffee (`) Instant Coffee (`)
Machine processing cost 5 ´ 20,000 = 1,00,000 5 ´ 1,20,000 = 6,00,000
Set-up cost 12,000 ´ 20 = 2,40,000 12,000 ´ 44 = 5,28,000
Purchase related cost 1,250 ´ 160 = 2,00,000 1,250 ´ 384 = 4,80,000
Total overhead cost 5,40,000 16,08,000
Number of units 5,000 60,000
Overhead cost per unit 108 26.80

MAY – 2022 – 10 Marks

Start Limited manufacture three products using the same production methods. A conventional
product costing system is being used currently. Details of three products for a typical period are:
Product Labour Hrs. Machine Hrs. Materials Volume
per unit per unit per unit (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.

Sunil Keswani PYQs of Cost & Management Accounting

 48

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
Cost 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 No. of inspections
of Materials
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.

Solution
Working Note:
Total Machine hours = (2 ´ 7,500) + (1.50 ´ 12,500) + (2.50 ´ 25,000) = 96,250
O<G7F 3L?>Q?769
Overhead absorption rate = O<G7F W7HQAD? V<K>9
O<G7F 3L?>Q?769
30 = (),"'&
Total overheads = `28,87,500

(i) Statement of Cost

Particulars Product AX (`) Product BX (`) Product CX (`)
Material cost per unit 35 25 45
Labour cost per unit 1.00 ´ 20 = 20 0.90 ´ 20 = 18 1.50 ´ 20 = 30
Overheads per unit 2.00 ´ 30 = 60 1.50 ´ 30 = 45 2.50 ´ 30 = 75
Total cost per unit 115 88 150

(ii) Calculation of Activity Cost Driver Rates

Activity Amount (`) Cost Driver Cost Driver Rate
Quantity (` )
Set-up Cost 28,87,500 ´ 40% = 1,540 set up `750 per set up
11,55,000
Machinery Cost 28,87,500 ´ 10% = 96,250 machine `3 per machine hour
2,88,750 hours
Material Handling 28,87,500 ´ 30% = 1,155 material `750 per material
cost 8,66,250 movement movement

Sunil Keswani PYQs of Cost & Management Accounting

 49

Inspection cost 28,87,500 ´ 20% = 1,500 inspections `385 per inspection

5,77,500

Statement of Cost
Particulars Product AX (`) Product BX (`) Product CX (`)
Set-up cost 750 ´ 350 = 750 ´ 450 = 750 ´ 740 =
2,62,500 3,37,500 5,55,000
Machinery cost 3 ´ 2 ´ 7,500 = 3 ´ 1.50 ´ 12,500 = 3 ´ 2.50 ´ 25,000 =
45,000 56,250 1,87,500
Material Handling 750 ´ 200 = 750 ´ 280 = 750 ´ 675 =
cost 1,50,000 2,10,000 5,06,250
Inspection cost 385 ´ 200 = 77,000 385 ´ 400 = 385 ´ 900 =
1,54,000 3,46,500
Total Overheads cost 5,34,500 7,57,750 15,95,250
No. of units 7,500 12,500 25,000
Overheads per unit 71.27 60.62 63.81
Material cost per unit 35 25 45
Labour cost per unit 1.00 ´ 20 = 20 0.90 ´ 20 = 18 1.50 ´ 20 = 30
Total cost per unit 126.27 103.62 138.81

DEC – 2021 – 10 Marks

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
Revenue (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 orders placed (in 560 810 630
nos)
Number of deliveries received 950 1,000 850
Hours 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 and
C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of goods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time

Sunil Keswani PYQs of Cost & Management Accounting

 50

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 cost of goods sold) are allocated in the ratio of cost of
goods sold
b) All the support costs (Other than cost of goods sold) are allocated using 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 situation as above.

Solution
(i) (a) Statement of operating income
Particulars Drug A Drug B Drug C Total
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
COGS 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Gross Margin 33,05,500 43,58,250 65,61,250 1,42,25,000
(-) Operating cost (in 16,57,800 27,26,700 48,25,500 92,10,000
COGS Ratio)
Operating Income (B) 16,47,700 16,31,550 17,35,750 50,15,000
Operating income % (B 22.12% 14.60% 9.32% 13.46%
÷ A)

(i) (b) Statement of Cost

Particulars Cost (`) (A) Cost Driver (B) Cost per cost driver
(A÷B)
Ordering 8,30,000 2,000 purchase order `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery
Shelf stocking 32,40,000 4,500 hours of shelf `720 per hour of shelf
stocking time stocking time
Customer support 28,20,000 4,70,000 units sold `6 per unit sold

Statement of operating income

Particulars Drug A Drug B Drug C
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000
COGS 41,44,500 68,16,750 1,20,63,750
Gross Margin (B) 33,05,500 43,58,250 65,61,250
Drug License Fee (in 1,00,000 1,50,000 2,50,000
2:3:5)
Ordering cost 415 ´ 560 = 2,32,400 415 ´ 810 = 3,36,150 415 ´ 630 =2,61,450
Delivery cost 650 ´ 950 = 6,17,500 650 ´1000 = 6,50,000 650 ´ 850 = 5,52,500

Sunil Keswani PYQs of Cost & Management Accounting

 51

Shelf Stocking cost 720 ´ 900 = 6,48,000 720 ´1250 = 9,00,000 720 ´2350 =
16,92,000
Customer support 6 ´ 175200 = 6 ´ 150300 = 6 ´ 144500 =
10,51,200 9,01,800 8,67,000
Operating cost (C) 26,49,100 29,37,950 36,22,950
Operating income (B– 6,56,400 14,20,300 29,38,300
C=D)
Operating income % 8.81% 12.71% 15.78%
(D÷A)

(ii) When the operating costs are distributed on the basis of cost of goods sold, Drug A has the
highest level of operating income percentage because lesser operating cost share is distributed
to it.

Activity based costing shows that Drug C uses the large amount of operating cost resources
than the other two drugs and simultaneously generates the highest level of revenue and thus
operating income percentage is maximum in case of Drug C.

JULY – 2021 – 10 Marks

PQR Ltd. is engaged in the production of three products P, Q and R. The company calculates
Activity Cost Rates on the basis of Cost Driver capacity which is provided as below:
Activity Cost Driver Cost Driver Cost (`)
Capacity
Direct Labour Hours Labour Hours 30,000 Labour Hours 3,00,000
Production runs No. of Production 600 Production runs 1,80,000
runs
Quality Inspections No. of Inspections 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity/ Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
You are required to:
(iv) Compute the cost allocated to each Product from each Activity.
(v) Calculate the cost of unused capacity for each activity
(vi) A potential customer has approached the company for supply of 12,000 units of net product
‘S’ to be delivered in lots of 1,500 units per quarter. This will involve an initial design cost
of `30,000 and per quarter production will involve the following:
Direct Material `18,000
Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspection 250

Sunil Keswani PYQs of Cost & Management Accounting

 52

Prepare cost sheet segregating direct and indirect cost and compute the sales value per quarter
of product ‘S’ using ABC system considering a markup of 20% on cost.

Solution
(i) Statement of Cost Driver Rate
Activity Amount Cost driver (B) Cost Driver Rate (A÷B)
(A)
Direct Labour 3,00,000 30,000 Labour Hours `10 per labour hour
Hours
Production runs 1,80,000 600 Production runs `300 per production run
Quality 2,40,000 8000 Inspections `30 per inspection
Inspections

Statement of Cost
Particulars P Q R Total
Direct labour 10 × 10,000 10 × 8,000 10 × 6,000
hour = 1,00,000 = 80,000 = 60,000 2,40,000
Production run 300 × 200 300 × 180 300 × 160
= 60,000 = 54,000 = 48,000 1,62,000
Quality 30 × 3,000 30 × 2,500 30 × 1,500
inspection = 90,000 = 75,000 = 45,000 2,10,000
Total Cost 2,50,000 2,09,000 1,53,000 6,12,000

(ii) Statement of Cost of Unused Capacity

Activity Total Cost Cost Charged to Products Unused Cost
Direct Labour 3,00,000 2,40,000 60,000
Hours
Production runs 1,80,000 1,62,000 18,000
Quality 2,40,000 2,10,000 30,000
Inspections

(iii) Statement of Cost

Particulars Amount (`)
Direct material 18,000
%&,&&& 3,750
Direct expenses (design cost) H!",&&& × 1,500I
Prime Cost 21,750
Add: Overheads
Direct labour hours (1,500 × 10) 15,000
Production run (15 × 300) 4,500
Quality inspection (250 × 30) 7,500

Sunil Keswani PYQs of Cost & Management Accounting

 53

COS 48,750
Add: Profit (48,750 × 20%) 9,750
Sales 58,500

JAN – 2021 – 10 Marks

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) 1200 1440 1968
Cost per unit:
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 Cost Driver Remarks
Overheads (`)
Material 50,000 No. of orders No. of orders was 25 units
Procurement for each product
Set-up 40,000 No. of Production All the three products are
Runs produced in production runs
of 48 units.
Quality Control 28,240 No. of Inspections Done for each production
run.
Maintenance 1,28,000 Maintenance Total maintenance hours
Hours were 6,400 and was
allocated in the ratio of 1:1:2
between X, Y and Z.
Required:
(iii) Calculate the total cost per unit of each product using the Absorption Costing Method.
(iv) Calculate the total cost per unit of each product using the Activity Based Costing.

Solution
Working Note:
(1) Total labour hours and recovery rate
Particulars Product X Product Y Product Z Total
Production units 1,200 1,440 1,968 1,27,500
Labour hours per unit 18÷4 = 4.50 20÷4 = 5 30÷4 = 7.50
Total labour hours 5,400 7,200 14,760 27,360
Total Overheads - - - 2,46,240
OHs recovery rate - - - `9

Sunil Keswani PYQs of Cost & Management Accounting

 54

(2) Cost per activity and driver

Activity Total cost Cost allocation base Cost driver rate
(1) ` (3) (4)=[(2)÷(3)]
(2)
Material 50,000 25 × 3 = 75 orders `666.67 per order
Procurement
Set-up 40,000 !"&& !$$& !().
+ + = 96 `416.67 per run
$. $. $.
run
Quality Control 28,240 !"&& !$$& !().
+ + = 96 `294.17 per run
$. $. $.
run
Maintenance 1,28,000 6,400 hours `20 per hour

(i) Statement of Cost per unit

Particulars X Y Z
Direct material 90 84 176
Direct labour 18 20 30
Overheads 9×4.50 = 40.50 9×5 = 45 9×7.50 = 67.50
148.50 149 273.50

(ii) Statement of Cost per unit

Particulars X Y Z
Direct material 90 84 176
Direct labour 18 20 30
Material "'×))).)* "'×))).)* "'×))).)*
= 13.89 = 11.57 = 8.47
!,"&& !,$$& !,().
procurement
Set-up cost !,"&&×$!).)* !,$$&×$!).)* !,().×$!).)*
$.×!,"&&
= 8.68 $.×!,$$&
= 8.68 $.×!,().
= 8.68
Quality control cost !,"&&×"($.!* !,$$&×"($.!* !,().×"($.!*
= 6.13 = 6.13 = 6.13
$.×!,"&& $.×!,$$& $.×!,().
! ! #
Maintenance "&×)$&&×( )
"
"&×)$&&×X Y
"
"&×)$&&×( )
"
!,"&&
= 26.67 = 22.22 !,().
= 32.52
!,$$&

Total Cost per unit 163.37 152.60 261.80

NOV – 2020 – 6 Marks

ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and Mixed Fruit.
The following cost data for the month of March 2020 are as under:
Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000
Material per unit 8 6 5
Direct Labour per unit (`) 5 4 3
No. of purchase orders 34 32 14

Sunil Keswani PYQs of Cost & Management Accounting

 55

No. of Deliveries 110 64 52

Shelf Stocking Hours 110 160 170
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.
Solution
(i) Statement of Cost Driver Rate
Activity Amount Cost driver (B) Cost Driver Rate (A÷B)
(A)
Ordering costs 64,000 34 + 32 + 14 = 80 orders `800 per order
Delivery costs 1,58,200 110 + 64 + 52 = 226 `700 per delivery
deliveries
Shelf Stocking 87,560 110 + 160 + 170 = 440 shelf `199 per shelf stocking
costs stocking hours hour

(ii) Statement of Cost

Particulars Apple Orange Mixed Fruit
Material 8 × 10,000 = 80,000 6 × 15,000 = 90,000 5 × 20,000 =
1,00,000
Direct labour 5 × 10,000 = 50,000 4 × 15,000 = 60,000 3 × 20,000 = 60,000
Overheads:
Ordering cost 800 × 34 = 27,200 800 × 32 = 25,600 800 × 14 = 11,200
Delivery cost 700 × 110 = 77,000 700 × 64 = 44,800 700 × 52 = 36,400
Shelf stocking cost 199 × 110 = 21,890 199 × 160 = 31,840 199 × 170 = 33,830
Total Cost 2,56,090 2,52,240 2,41,430

NOV – 2019 – 10 Marks

PQR Ltd. has decided to analyze 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 9360 14200 62000 38000 9800
List selling price ` 54 54 54 54 54
Actual selling price 54 53.40 49 50.20 48.60
Number of purchase orders 30 50 60 50 60

Sunil Keswani PYQs of Cost & Management Accounting

 56

Number of customers visits 4 6 12 4 6

Number of deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expediate deliveries 0 0 0 0 2
It’s five activities and their cost drivers 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 `2.0 per case sold
Expedited deliveries `100 per each such delivery

You are required to:

(i) Compute the customer level operating income of each of five retail customers by sing 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’.

Solution
(i) Statement of operating income
Particulars Customer Customer Customer Customer Customer
A B C D E
Units 9,360 14,200 62,000 38,000 9,800
Revenue 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
[54 × No. of units]
(-) Discount - 8,520 3,10,000 1,44,400 52,920
[(List price – Actual
price) × No. of units]
Net revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(-) Order taking 6,000 10,000 12,000 10,000 12,000
[200×No. of purch. order]
(-) Customer visit 1,200 1,800 3,600 1,200 1,800
[300×No. of visit]
(-) Deliveries 3,200 2,880 4,800 6,400 9,600
[4 × km travel × No. of
deliveries]
(-) Production handling 18,720 28,400 1,24,000 76,000 19,600
[2 × No. of units]
(-) Expedited deliveries - - - - 200
[100×No. of delivery]
(-) COGS 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000

Sunil Keswani PYQs of Cost & Management Accounting

 57

[45 × No. of units]

Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)
(ii) Separate disclosure of revenue helps us to identify the relationship between discount and sales
quantity.
Customer Quantity Discount Discount %
A 9,360 - 0%
C 62,000 5 5÷54 = 9.25%
D 38,000 3.80 3.80÷54 = 7.03%
E 8,775 5.40 5.40÷54 = 10%
Customer D gets lower discount as compared to Customer C. It may be due to lower quantity
purchased by customer D as compared to Customer C.
Customer E gets higher discount as compared to Customer A. Customer E discount is higher
in-spite of ordering comparative lower quantity and its reason should be further explored.

MAY – 2019 – 10 Marks

MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of
direct labour hours. The budgeted overheads and direct labour hours for the month of March 2019
are `15,00,000 and 25,000 hours respectively. The information about the company’s products is
as follows:
Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost `350 per unit `400 per unit
Direct Labour Cost
A: 3 hours @ `120 per hour `360
B: 4 hours @ `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 orders processed, machine hours worked and
inspection hours respectively. The data relevant to these activities is as follows:
Orders Processed Machine hours Inspection hours
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.

Sunil Keswani PYQs of Cost & Management Accounting

 58

(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 hours as an
application base, calculate the amount of cost distortion (under costed or over costed) for
each equipment.

Solution
(i) Overhead application base: Direct Labour Hours

Equipment A (`) Equipment B (`)

Direct material cost 350 400
Direct labour cost 360 480
Overheads (60×3)(60×4) 180 240
890 1,120
ZK6E?G?6 3L?>Q?769 !',&&,&&&
Pre-determined overhead rate = ZK6E?G?6 6A>?HG F7S<K> Q<K>9= "',&&&
= `60

(ii) Estimation of cost-driver rate

Activity Overhead Cost (`) Cost-driver level Cost driver rate (`)
Order processing 3,00,000 600 order processed 500
Machine processing 10,00,000 50,000 machine hrs. 20
Inspection 2,00,000 15,000 inspection hrs. 10

Calculation of Overhead Costs

Activity Equipment A (`) Equipment B (`)
Order Processing (400×500) (200×500) 2,00,000 1,00,000
Machine processing (22,500×20) (27,500×20) 4,50,000 5,50,000
Inspection (5000×10) (10,000×10) 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000
Total units 3,200 3,850
Overhead per unit 218.75 207.79

Calculation of cost per unit

Equipment A (`) Equipment B (`)
Direct material cost 300 400
Direct labour cost 360 480
Overheads 218.75 207.79
928.75 1,087.79

(c) Statement of cost

Sunil Keswani PYQs of Cost & Management Accounting

 59

Equipment A (`) Equipment B (`)

Unit manufacturing cost-using direct 890 1,120
labour hours as an application base
Unit manufacturing cost-using activity 928.75 1,087.79
based costing
Cost distortion (-) 38.75 + 32.21

NOV – 2018 – 10 Marks

M/s HMB Limited is producing a product in 10 batches each of 15,000 units in a year and incurring
following overheads thereon:
Amount (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime cost for the year amounted to `3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of prime cost.
Now it wants to shift to activity-based costing. Information relevant to activity drivers for a year
are as under:
Activity Driver Activity Volume
No. of purchase orders 1,500
Maintenance hours 9,080
No. of set-ups 2,250
No. of inspections 2,710
The company has produced a batch of 15,000 units and has incurred `26,38,700 and `3,75,200
om materials and wages respectively.
The usage of activities of the said batch are as follows:
Material orders 48 orders
Maintenance hours 810 hours
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.

Solution
(i) Calculation of cost under Absorption Costing:
O<G7F <L?>Q?769 '!,*(,%&&
Overheads absorption rate = O<G7F [>AJ? 49<G × 100 = %,&!,%(,&&& × 100 = 17.18%
Particulars Amount (`)
Material 26,38,700

Sunil Keswani PYQs of Cost & Management Accounting

 60

Wages 3,75,200
Prime cost 30,13,900
Overheads (30,13,900 × 17.18%) 5,17,930
Total cost 35,31,830
Units 15,000
Cost per unit 235.46

(ii) Statement showing Activity Based Costing

Activity Total Activity Cost Driver
Amount Volume Rate
Material Procurement 22,50,000 1,500 1,500
Maintenance 17,30,000 9,080 190.53
Setup 6,84,500 2,250 304.22
Quality Control 5,14,800 2,710 189.96

Calculation of total cost and cost per unit:

Particulars Amount (`)
Material 26,38,700
Wages 3,75,200
Prime cost 30,13,900
Material purchase (1,500 × 48) 72,000
Maintenance (190.53 × 810) 1,54,328
Set-up (304.22 × 40) 12,169
Quality Control (189.96 × 25) 4,749
Total Cost 32,57,146
Unit 15,000
Cost per unit 217.14

MAY – 2018 – 10 Marks

PQR Pens Ltd. manufactures two products – ‘Gel Pen’ and ‘Ball Pen’. If furnishes the following
data for the year 2017:
Product Annual Output Total Machine Total number Total number
(Units) Hours of Purchase of set-ups
orders
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

Sunil Keswani PYQs of Cost & Management Accounting

 61

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 the difference in cost per unit between both the methods.

Solution
(i) Calculation of cost under Traditional Approach:
O<G7F <L?>Q?769 !',)&,&&&
Overheads rate per Machine hour = O<G7F J7HQAD? Q<K>9= "$,&&&/'$,&&& = `20 per machine hour

Statement of Cost
Particulars Gel Pen Ball Pen
Overheads absorbed (A) 20 × 24,000 = 4,80,000 20 × 54,000 = 10,80,000
Units (B) 5,500 24,000
Overheads per unit (A ÷ B) 87.27 45
(ii) Statement showing Activity Based Cost
Activity Cost Pool Cost Driver Ratio Total Gel Pen Ball Pen
Amount (` ) (` )
(`)
Volume Related Machine Hour 24:54 4,75,020 1,46,160 3,28,860
Activity Costs
Set-up Related No. of Set-ups 30:56 5,79,988 2,02,321 3,77,667
Costs
Purchase Related No. of Purchase 240:448 5,04,992 1,76,160 3,28,832
Costs Orders
Total Costs 5,24,641 10,35,359
Output (Units) 5,500 24,000
Cost per unit 95.39 43.13

(iii) Statement of Difference in Cost

Particulars Gel Pen Ball Pen
Overheads cost per unit (`) – Traditional Approach 87.27 45
Overheads Cost per unit (`) – ABC 95.39 43.13
Difference per unit -8.12 +1.87

Sunil Keswani PYQs of Cost & Management Accounting