Caselets – Activity Based Costing

1. Image furnishing ltd. manufactures a variety of premium board room chairs. Its
job-costing system is designed using an activity based approach. There are two
direct cost categories consisting of direct materials and direct manufacturing
labour and three indirect pools representing three activity areas at the plant:

Manufacturing Budgeted Cost Driver Allocation

activity costs (Rs.) Rate (Rs.)
Material 2,00,000 Parts 0.25
handling
Cutting 21,60,000 Parts 2.50
Assembly 20,00,000 Direct manufacturing labour-hours 25.00
Two styles of chairs were produced in March: Executive chair and chairman
chair. Their quantities, direct materials costs and other data for March as
follows:
Type of chair Units Direct Number of Direct
produced Material parts manufacturing
cost (Rs.) labour-hours

Executive 5,000 6,00,000 1,00,000 7,500

Chairman 100 25,000 3,500 500

The direct manufacturing labour rate is Rs. 20 per hour. Assuming no opening
and closing inventory, compute the total manufacturing costs and unit costs of
the two types of chairs.
2. The Aeronautical ltd. has production facility specializing for the aircrafts
components market. The traditional costing system has two direct-cost
categories, namely, direct materials and direct manufacturing labour and a
single indirect cost pool, that is, manufacturing overhead allocated on the basis
of direct labour-hours. The indirect cost allocation rate would have been Rs.
115 per direct manufacturing labour-hour.

The company has now decided to replace the single indirect cost pool with five
indirect cost pools, representing five activity areas each with its own
supervising and budget responsibility.
The relevant data are as follows:
Activity Cost Driver Allocation Rate (Rs.)
Material handling Parts 0.40
Lathe work Turns 0.20
Milling Machine-hours 20.00
Grinding Parts 0.80
Testing Units tested 15.00

Two representative jobs processed under the new system of the facility at the
most recent period had the following features:
Particulars Job 101 Job 102
Direct material costs per job Rs. 9,700 Rs. 59,900
Direct manufacturing labour cost per job Rs. 750 Rs. 11,250
Direct manufacturing labour-hours per job 25 375
Parts per job 500 2,000
Turns per job 20,000 60,000
Machine-hours per job 150 1,050
Units per job 10 200

i. Calculate the per unit manufacturing costs of each job under the
traditional job-costing system.
ii. Calculate the per unit manufacturing costs of each job under the activity
based costing system.
3. A company manufactures two products furnishes the following data for a year:

Product Annual output Total-machine Total number Total number

(units) hours of purchase of set-ups
orders
A 5,000 20,000 160 20
B 60,000 1,20,000 384 44

The annual overheads are as under:

Activity Costs (Rs.)
Volume related activity costs 5,50,000
Set-up related costs 8,20,000
Purchase related costs 6,18,000
i. Calculate per unit manufacturing costs of each product under the
traditional job-costing system.

ii. Calculate per unit manufacturing costs of each product under the activity
based costing system.
4. Family store wants information about the profitability of individual product
lines: soft drinks, fresh produce and packaged food. The store provides the
following data for the current year for each product line:

Particulars Soft drinks Fresh produce Packaged food

Revenues Rs. 7,93,500 Rs. 21,00,600 Rs. 12,09,000
Cost of goods sold Rs. 6,00,000 Rs. 15,00,000 Rs. 9,00,000
Cost of bottles Rs. 12,000 0 0
returned
Number of purchase 360 840 360
orders placed
Number of deliveries 300 2,190 660
received
Hours of shelf- 540 5,400 2,700
stocking time
Items sold 1,26,000 11,04,000 3,06,000
Family stores also provide the following information for the current year:

Activity Description of activity Total Cost (Rs.) Cost Allocation base

Bottle returns Returning of empty bottles 12,000 Direct tracing of soft
drink line
Ordering Placing of orders for purchases 1,56,000 1,560 purchase orders
Delivery Physical delivery and receipt of 2,52,000 3,150 deliveries
goods
Shelf-Stocking Stocking of goods on store 1,72,800 8,640 hours of shelf-
shelves and on-going restocking stocking time
Customer Assistance provided to customers 3,07,200 15,36,000 items sold
support including checkout

i. Family stores currently allocates support cost (all costs other than cost of
goods sold) to product lines on the basis of cost of goods sold of each
product line. Calculate the operating income for each product line.
ii. If Family stores allocates support cost (all costs other than cost of goods
sold) to product lines using activity based costing system, calculate the
operating income for each product line.