Example – 1

The budgeted overhead and cost driver volumes of Z Ltd are as follows:

Cost Pool Budgeted Overhead Cost Driver Budgeted Volume

Material 4,05,000 No. of Orders 900
Procurement
Machine set-up 3,59,100 No. of Setups 450
Maintenance 2,40,000 Maintenance Hours 3,000
Quality Control 1,40,000 No. of Inspections 700
Machinery 4,80,000 Machine Hours 24,000
The company has produced a batch of 2,500 components of AZ-4, its material cost
was ₹ 1,10,000 and labour cost ₹ 1,90,000. The usage of activities of this batch are as
follows:
Material Orders – 21; Setups of machine – 19; Maintenance Hours – 510; Number of
inspections – 26 and Machine Hours – 1300.
Calculate cost driver rates that are used for computing appropriate amount of
overhead to this batch and ascertain the cost of the batch of the component using Activity
Based Costing.

Solution

Computation of Cost Driver Rates

Particulars Details Cost Driver Rate

Material Procurement 405000 ÷ 900 ₹ 450
Machine Set up 359100 ÷ 450 ₹ 798
Maintenance 240000 ÷ 3000 ₹ 80
Quality Control 140000 ÷ 700 ₹ 200
Machinery 480000 ÷ 24000 ₹ 20

Statement of Cost of Batch AZ-4

Batch Size = 2,500

Particulars ₹ Amount ₹
Direct Materials 1,10,000
Direct Labour 1,90,000
Prime Cost 3,00,000
Overheads :
Material Orders – 21 x ₹ 450 9,450
Machine Set up -19 x ₹ 798 15,162
Maintenance Hours – 510 x ₹ 80 40,800
No of Inspections – 26 x ₹ 200 5,200
Machine Hours – 1300 x ₹ 20 26,000 96,612
Total Cost of Batch 3,96,612

Example – 2

A Company manufacturing two products furnishes the following data for a year:
Product Annual Output Total Machine Total no of Total no of set-
(Units) Hours purchase orders ups
A 5,000 20,000 160 20
 B 60,000 1,20,000 384 44
The annual overheads are as under:
Volume related activity costs ₹ 5,50,000
Set-up related costs ₹ 8,20,000
Purchase related costs ₹ 6,18,000

You are required to calculate the cost per unit of Product A and B based on :
(a) Traditional method of charging overheads
(b) Activity Based Costing method

Solution
Total Overhead incurred by the Organisation
= (5,50,000 + 8,20,000 + 6,18,000) = ₹ 19,88,000
Total Machine hours budgeted = (20,000 + 1,20,000) = 1,40,000
As per Traditional Costing ; Overhead absorption based on Machine Hour
= 19,88,000 ÷ 1,40,000 = ₹ 14.20
Statement of Overhead Cost Per Unit (Traditional Method)

Product Annual Output Total Machine OH Cost per OH Cost PU

Hours component
A 5000 20,000 20000 x 14.20= (284000/5000) =
2,84,000 ₹ 56.80
B 60000 1,20,000 1,20,000 x (1704000/60000)
14.20 = = ₹ 28.40
1704000

Statement of Overhead Cost Per Unit (Activity Based Costing Method)

Computation of Cost per Cost Driver:

Machine Hour Rate = Total Annual OH for Volume related Activities / Total Machine hours
= ₹ 5,50,000 / 1,40,000 = ₹ 3.93
Cost Per Set-up = Total Annual OH for Set-ups / Total number of Set-ups
= ₹ 8,20,000 / 64 = ₹ 12,812.50
Cost per Purchase Order = Total Annual OH for Purchase related activities / No of Purchase
orders = ₹ 6,18,000 / 544 = 1136.03

Product Annual Machine Cost Cost Cost Total Cost

Output Hours Related related Related to Per
to to Setup Purchases unit
Volume
A 5000 20,000 20000 x 20 x 160 x 516614.80 103.32
3.93 = 12812.50 1136.03 =
78600 = 256250 181764.80
B 60000 1,20,000 120000 44 x 384 x 1471585.5 24.53
x 3.93 = 12812.50 1136.03 = 2
471600 = 563750 436235.52
Example – 3

Alpha Ltd has decided to analyse the profitability of its five new customers. It buys bottled
water at ₹ 90 per case and sells to retail customers at a list price of ₹ 108 per case. The data
pertaining to five Customers are as under:

Customers
Particulars
A B C D E
1,36,80
Cases sold 4,680 19,688 0 71,550 8,775
List Selling Price 108 108 108 108 108
Actual Selling Price 108 106.20 99 104.40 97.20
No of Purchase orders 15 25 30 25 30
No of Customer Visits 2 3 6 2 3
No of Deliveries 10 30 60 40 20
Kms travelled per delivery 20 6 5 10 30
No of expedited deliveries 0 0 0 0 1
Its five activities and their drivers are:
Activity Cost driver rate
Order taking ₹ 750 per purchase order
Customer Visits ₹ 600 per customer visit
Deliveries ₹ 5.75 per delivery km travelled
Product handling ₹ 3.75 per case sold
Expedited Deliveries ₹ 2,250 per expedited delivery
Required:
Compute the customer level operating income of each of five retail customers now being
examined and comment on the results.

Solution

Calculation of Customer Level Activity Costs

Customers
Particulars
A B C D E
Order taking 11,25 18,75
No of Pur Orders x 750 22,500 18,750 22,500
Costs 0 0
Customer
No of visits x 600 1,200 1,800 3,600 1,200 1,800
visit Costs
Delivery
Vehicle Kms travelled x 5.75 per km 1,150 1,035 1,725 2,300 3,450
Travel Costs
Product
17,55 73,83 5,13,00 2,68,31
handling Cases sold x 3.75 32,906
0 0 0 3
costs
Cost of
No of expedited deliveries x
expedited - - - - 2,250
2,250
deliveries
Total cost of customer level operating 31,15 95,41 5,40,82 2,90,56
62,906
activities 0 5 5 3

Calculation of Customer Level Operating Income

Customers
 A B C D E
(A) Cases Sold 4,680 19,688 1,36,800 71,550 8,775
(B) Actual Selling Price (₹) 108 106 99 104 97
(C ) Cost (₹) 90 90 90 90 90
20,90,86 1,35,43,20
Sales at actual Price (A x B) 5,05,440 74,69,820 8,52,930
6 0
17,71,92 1,23,12,00
Less : Cost of Goods Sold (A x C) 4,21,200 64,39,500 7,89,750
0 0
Gross Margin 84,240 3,18,946 12,31,200 10,30,320 63,180
Less : Customer level activity
31,150 95,415 5,40,825 2,90,563 62,906
Costs
Customer Level Operating
53,090 2,23,531 6,90,375 7,39,757 274
Income

Example – 4

Supreme Industries Ltd manufactures four products P, Q, R & S. Following

information is given for a certain period :

Product P Q R S
Good output (in units) 960 720 600 504
Average Yield (%) 80 80 96 90
Machine Hours per unit of Input 4 3 2 1

The plant works such that after machining, the defectives in each run are
automatically segregated and stored separately in a container. The good units pass
through the process and are further checked for quality by the Quality Control
Inspectors who charge by the number of batches inspected.

The total production and selling overheads of the Company for the period are as
under:-
Machine Operation and Maintenance ₹ 1,32,750
Set-up Costs ₹ 38,400
Stores Receiving ₹ 42,800
Inspection ₹ 48,000
Finished Goods - Packing and Dispatch ₹ 28,800
2,90,750
Following additional information is given:
1. A Material Requisition is made for every 25 units of input
2. Machines need to be set-up and tuned after each production run.
3. Production is in batches of 24 good units for all the products.
4. Units of P and Q are packed in boxes that have 24 units capacity each whereas R and S are
packed in smaller boxes of 12 units capacity. The smaller box costs half the price of the bigger
box. Each box contains only one type of product. There is no product mix up in packing.

Choose appropriate Activity Cost Drivers for each Overhead cost and calculate the
Overhead Cost per unit of good output for each of the products under the ABC
System.
Solution:

1. Basic Computations

Particulars A B C D Total
(a) Good Output Units (given) 960 720 600 504  
(b) Average Yield (%) (Given) 80 80 96 90  

(c) Input (a) ÷ (b) 1200 900 625 560

 
(d) Machine Hours per unit of Input 4 3 2 1  
(e) Total Machine Hours required 4800 2700 1250 560 9310
(f) No of Material Requisitions (c) ÷ 25 48 36 25 22.4 131.4
(g) No of Production setups (a) ÷ 24 40 30 25 21 116
(h) No of Packing boxes required 40 30 50 42  
(i) Box Cost / Qty Ratio 1 1 0.5 0.5  
(j) Eqvt no of Big boxes (h) x (i) 40 30 25 21 116

2. Computation of ABC Recovery Rates

Activity Cost Driver

Activity Pool Cost Driver Qty ABC Rate
      ₹  
per
14.2
Machine Operation and Maint ₹ Machine Hours 9310 machine
1,32,750 6
hour
No of Prodn 33
Set-up Costs ₹ 116 per batch
38,400 Runs 1
325.7 per
Stores Receiving ₹ Material Reqn 131.4
42,800 2 Requistion
No of Prodn 41
Inspection ₹ 116 per batch
48,000 Runs 4
No of Eqvt 24 per Eqvt
116
Finished Goods - Packing and Dispatch ₹ 28,800 boxes 8 Box

3. Cost Statement under ABC

Particulars A B C D Total
Machine Operation and Maintenance ₹
68,443 38,499 17,824 7,985 1,32,750
Set-up Costs ₹
13,241 9,931 8,276 6,952 38,400
Stores Receiving ₹
15,635 11,726 8,143 7,296 42,800
Inspection ₹
16,552 12,414 10,345 8,690 48,000

Finished Goods - Packing and Dispatch ₹ 9,931 7,448 6,207 5,214 28,800
Total Overhead Cost
1,23,801 80,018 50,794 36,136 2,90,750
Good output Units 960 720 600 504
Overhead Rate per unit ₹
128.96 111.14 84.66 71.70