Example 01 (Giga Incorporation):

Giga Incorporations is at the leading edge of paint-spraying technology. It has three customers A,
B and C, who produce G-101, G-102 and G-103 products respectively. These products are finished
by Giga Incorporation after final completion. Product G-101 requires 6 coats of paint, product G-
102 requires 4 coats and product G-103 requires 3 coats of paint. All products are of different
shapes and sizes therefore, different quantities of paint are needed. Paint is delivered in batches
of various sizes, depending upon the finishing required.

Products Litres per unit

G-101 7

G-102 5

G-103 4
Production details for each product are budgeted as follows for the coming month:

Description G-101 G-102 G-103

Units sprayed 500 400 300

Batches of paint required 10 8 6

Machine attendant time in minutes 45 60 50

Cost of paint per unit Rs. 550 500 450
Machine attendants are paid Rs. 86 per hour.
Estimated overheads in the coming month are given below:

Rupees
Paint stirring and quality control 50,000
Electricity 150,000
Filling of spraying machines 90,000
Cost drivers used for each activity are as follows:

Activity Cost driver

Paint stirring and quality control Batches of paint

Electricity Coats of paint

Filling of spraying machines Litres of paint

Required:
Calculate the unit cost of each product using activity-based costing.
Activity based costing - SOLUTIONS

Ex-01 Giga Incorporations

G-101 G-102 G-103
Cost per unit: --------------------- Rs. ---------------------
Paint cost 550.00 500.00 450.00
Attendant wages [Rs. 86 x 45/60] [Rs. 86 x 60/60] [Rs. 86 x 50/60] 64.50 86.00 71.67
FOH (W-1) 299.33 217.92 177.22
913.83 803.92 698.89

W-1 FOH allocation using activity based costing:

Cost pool Cost driver Total G-101 G-102 G-103
------------------------------ Rs. ----------------------------
Batches of
Paint stirring and QC 50,000 20,833 16,667 12,500
paint [10:8:6]
Coats of paint
Electricity 150,000 81,818 43,636 24,546
(W-2)
Litres of paint
Filling of spraying machines 90,000 47,015 26,866 16,119
(W-3)
[A] 149,666 87,169 53,165

Units sprayed [B] 500 400 300

OH cost per unit [Rs.] [A/B] 299.33 217.92 177.22

W-2 Coats of paint [i.e. units sprayed x coats per unit]

G-101 [500 x 6] 3,000
G-102 [400 x 4] 1,600
G-103 [300 x 3] 900
5,500

W-3 Litres of paint [i.e. units sprayed x litres per unit]

G-101 [500 x 7] 3,500
G-102 [400 x 5] 2,000
G-103 [300 x 4] 1,200
6,700
Example 02 (Rizwan Industries):
Rizwan Industries has six standard products from stainless steel and brass. The company’s
most popular product is RI-11 and following budgeted data is given for product RI-11.

Activity Cost driver Cost driver Cost pool Rs.

volume/year

Purchasing costs Purchase orders 15,000 750,000

Setting costs Batches produced 28,000 1,120,000

Material handling costs Material requisition 80,000 960,000

Inspection costs Inspections 28,000 700,000

Machining costs Machine hours 500,000 1,500,000

Rizwan manufacturing industries data relating to RI-11 for the month of July, 2021 is given
below.

Description

Purchase orders 25

Output in units 15,000

Production batch size in units 100

Material requisition per batch 6

Inspections per batch 1

Machine hours per unit 0.1

Required:
Calculate the unit overhead cost of product RI-11 using activity-based costing.
Activity based costing - SOLUTIONS

Ex-02 Rizwan Industries

Total FOH for R-11: Rs.

Purchasing cost [Rs. 750,000 x 25/15,000] 1,250
Setting cost [Rs. 1,120,000 x 150(W-1)/28,000] 6,000
Material handling cost [Rs. 960,000 x 900(W-2)/80,000] 10,800
Inspection cost [Rs. 700,000 x 150/28,000] 3,750
Machining cost [Rs. 1,500,000 x 1,500(W-3)/500,000] 4,500
26,300

Units 15,000

FOH cost per unit [26,300 / 15,000] 1.75

W-1
Number of batches for R-11 [15,000 / 100] 150

W-2
Number of material requisitions for R-11 [6 x 150(W-1)] 900

W-3
Machine hours for R-11 [0.1 x 15,000] 1,500
Example 03 (JAM Enterprises):
JAM Enterprises, is engaged in the manufacturing of fishing equipment for fishing industry since
a decade. Recently, some of other manufacturers newly entered in to the same business of JAM
Enterprises. As a result, a price competitive situation has occurred in the market, to handle this
situation JAM Enterprises wants to offer best prices for the products as compare to competitors;
JAM Enterprises changed his costing approach to ABC, from traditional full costing approach.
The following budgeted information is related to JAM Enterprises for the forthcoming period:

Activity Product J Product A Product M

Sales and production (units) 30,000 20,000 10,000

Selling price per unit 4,600 9,600 7,400

Prime cost per unit 3,100 8,300 6,400

Machine hours per unit 2.5 5.5 4.5

Labour hours per unit 7.5 3.5 3.5

The overheads that could be re-analyzed in to cost pools for the purpose of Activity based costing,
are as follows:

Cost pool Rs. 000 Cost driver Quantity for the period

Machine services 18,400 Machine hours 230,000

Assembly services 18,150 Direct labour hours 330,000

Set-up costs 1,200 Set-ups 250

Order processing 7,200 Customer orders 16,000

Purchasing 4,004 Supplier orders 5,600

Following estimates have also been provided for the period:

Cost drivers Product J Product A Product M

Number of set-ups 70 100 80

Number of customer orders 4,800 4,500 6,700

Number of supplier orders 1,800 2,200 1,600

Required:
Calculate the product-wise profit statement, using activity-based costing.
Activity based costing - SOLUTIONS

Ex-03 JAM Enterprises

Product J Product A Product M
--------------------- Rs. 000 ---------------------
Sales [sale price x units sold] 138,000 192,000 74,000
Prime cost [prime cost per unit x units sold] (93,000) (166,000) (64,000)
FOH (W-1) (22,158) (16,728) (10,068)
22,842 9,272 (68)

W-1 FOH allocation using activity based costing: Product J Product A Product M
---------------------- Rs. 000 --------------------
Machine services [Rs. 18.4m x Machine hours(W-2)/230,000] 6,000 8,800 3,600
Assembly services [Rs. 18.15m x Labor hours(W-3)/330,000] 12,375 3,850 1,925
Set-up costs [Rs. 1.2m x No. of set-ups/250] 336 480 384
Order processing [Rs. 7.2m x No. of customers orders/16,000] 2,160 2,025 3,015
Purchasing [Rs. 4.004m x No. of suppliers orders/5,600] 1,287 1,573 1,144
22,158 16,728 10,068

W-2 Machine hours

Product J [30,000 x 2.5] 75,000
Product A [20,000 x 5.5] 110,000
Product M [10,000 x 4.5] 45,000

W-3 Direct Labor hours

Product J [30,000 x 7.5] 225,000
Product A [20,000 x 3.5] 70,000
Product M [10,000 x 3.5] 35,000