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Suggested Answer

Cost & Management Accounting Duration: 65

Details: Test – 5 (Ch-5) Marks: 35

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets in
arranged manner.
 In case of multiple choice questions, mention option number only Working notes are compulsory
wherever required in support of your solution
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performance.

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Ans-1.

(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method

Particulars Equipment Y Equipment Z

Direct material cost Rs.300 Rs.450

Direct labour cost Rs.450 Rs.600

Overheads @ Rs 62.125 per hour for 3 hours and 4 hours Rs.186.38 Rs.248.50

Manufacturing cost per unit Rs.936.38 Rs.1,298.50

Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours= Rs.12,42,500 ÷ 20,000
hours = Rs.62.125/hour

Total labour hours= 2,500 units of Y × 3 hours + 3,125 units of Y × 4 hours = 20,000 hours

(2) Statement Showing Unit Manufacturing Cost Using ABC Method

Particulars Equipment Y Equipment Z

Direct material cost Rs.300 Rs.450

Direct labour cost
Rs.450 Rs.600
Overheads per unit (W.N.)
Rs.226.80 Rs.216.16

Manufacturing cost per unit Rs.976.80 Rs.1,266.16

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 (3) Statement Showing Cost Distortion

Particulars Equipment Y Equipment Z

Unit manufacturing cost:

Using direct labour hours as an application base 936.38 1298.50

Using activity based costing 976.80 1,266.16

Cost distortion (-) 40.42 + 32.34

Low volume product Y is under-costed and high volume product Z is over-costed using direct
labour hours for overhead absorption.

Working note:

Calculation of overheads cost per unit under ABC costing

Overhead Overheads

Activity cost Cost driver Ratio

Y Z

Orders
processed
Order processing Rs.2,10,000 350 : 250 Rs.1,22,500 Rs.87,500

Machine

processing Rs.8,75,000 Machine hours 23,000 : 27,000 Rs.4,02,500 Rs.4,72,500

Inspection

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 Inspection Rs.1,57,500 hours 4,000 : 11,000 Rs.42,000 Rs.1,15,500

Rs.

Total overheads Rs.5,67,000 6,75,500

÷ Number of units ÷ 2,500 ÷ 3,125

Overhead per unit Rs.226.80 Rs.216.16

(9 Marks)

Ans-2.

(i) Statement showing calculation of Total Manufacturing cost & profit by using Direct Labour hour
rate for recovery of overheads.

Particulars Product A (Rs.) Product B (Rs.)

Sales (A) 3,780,000 2,055,000

Direct Material 1,125,000 675,000

Direct Labour 600,000 195,000

Indirect Cost @ Rs. 60 per Labour Hours 1,800,000 585,000

Total cost (B) 3,525,000 1,455,000

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Profit (A) - (B) 255,000 600,000

Output (Units) 60,000 15,000

Cost per Unit 58.75 97

Working Note: (1)

Absorption Rate = = = Rs.60 per labour hour

(ii) Statement showing estimation of Total Manufacturing cost & profit using Activity Based Costing

Particulars Product A (Rs.) Product B (Rs.)

Output (units) 60,000 15,000

Sales (A) 3,780,000 2,055,000

Direct Material 1,125,000 675,000

Direct Labour 600,000 195,000

Indirect Cost 1,357,728 1,027,274

Total Cost (B) 3,082,728 18,97,274

Profit (A) - (B) 6,97,272 1,57,726

Unit Cost (Total cost/units) 51.38 126.48

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Working Note (2): Statement showing estimation of cost- driver rate:

Type of Cost Activity Cost Cost Drive Units of driver Cot driver Rate (Rs.)
(Rs.) (A) (B) (A) + (B)

Designing 450,000 Square Feet 100 Square feet 4,500

Manufacturing 637,500 Moulding 12,750 hours 50

machine

Operations Hour

Shipment 81,000 No. of 200 Shipments 405

shipment

Distribution 391,500 Cubic Feet 67,500 cubic 5.8

feet

Set up of moulding 300,000 Set up hours 2,000 set up 150

machine hour

Factory 255,000 Direct Labour 39,750 Labour 6.4151

administration Hours hours

Cleaning & 270,000 Direct Labour 39,750 Labour 6.7925

Maintenance Hours hours

(3) Set up hours = ( )+( ) = 2,000 set up hours

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(4) Statement showing apportionment of Indirect Cost

Particulars of Cost Cost Driver A (Rs.) B (Rs.)

Designing Square feet 135,000 (4500 × 30) 315,000 (4500 × 70)

Manufacturing Moulding machine

450,000 (50 × 9000)
operation hours 187,500 (50 × 3750)

Shipment No. of Shipment 40,500 (405 × 100) 40,500 (405 × 100)

Distribution Cubic Feet 261,000 (5.8 × 45000) 130,500 (5.8 × 22500)

Set up of machine Set up hours 75,000 ( 150 × 500) 225,000 (150 × 1500)

192,453 (6.4151 × 62,547 ( 6.4151 ×

Factory administration Direct Labour Hours
30,000) 9,750)

Cleaning & 203,775 ( 6.7925 × 66,227 ( 6.7925 ×

Direct Labour Hours
maintenance 30,000) 9,750)

Total Indirect Cost 13,57,728 10,27,274

(iii) Statement showing difference

Particulars A (Rs.) B (Rs.)

Total Cost LHR 3,525,000 1,455,000

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Total Cost ABC 3,082,728 1,897,274

Total Cost-Difference (442,272) (442,274)

Unit Cost LHR 58.75 97

Unit Cost ABC 50.48 126.48

Unit Cost-Difference 8.27 (29.48)

Comment: The use of Activity Based Costing gives different product costs than what were arrived at
by using traditional costing. It can be argued that product costs using ABC are more precise as indirect
costs have been identified with specific activities.

(8 Marks)

Ans-3.

(i) Statement showing calculation of cost per unit using conventional methods

Particulars X Y Z

Direct Material 20 12 25

Direct Labour @ Rs.6 per hour 3 9 6

Overhead @ Rs.28 per machine hour 42 28 84

Total 65 49 115

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Total Overhead = Rs. 28 × 23,375 (Machine hours) = Rs. 654,500/-

(ii) Statement showing calculation of cost per unit using Activity Based Costing

Particulars X Y Z

Direct Material 20 12 25

Direct Labour 3 9 6

Overhead 94.95 79.07 69.21

Total 117.95 100.07 100.21

Working Notes:

(1) Statement showing Computation of overheads rates

Amount of cost Units Cost Cost driver Rate

Type of Cost Cost Driver (B)
(Rs.) (A) Driver (Rs.) (A)÷ (B)

Set ups 229,075 No. of set ups 670 341.90

Machinery 130,900 Machine hours 23,375 5.60

No. of Movements of
Material handling 98,175 120 818.125
Material

Inspection 196,350 No. of Inspections 1,000 196.35

654,500

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 (2) Statement Showing apportionment of overhead

Type of Cost Cost Driver X y Z

25642.5
39,318.5 164,112
Set ups No. of setups
(341.96 ×
(341.9 × 115) (341.9 × 480)
75)

6300
7000 117,600
Machinery Machine hours
(5.60 ×
(5.60 × 1250) (5.60 × 21,000)
1125)

9817.5
No. of movements 17180.63 (818.125 71176.88 (818.125
Material handling
of material (818.125 × × 21) × 87)
12)

29452.5
35,343
131,554.5 (196.35 ×
Inspection No. of inspection
(196.35 × 670)
(196.35 × 180)
150)

71,212.50 98,842.13 484,443.38

Output (units) 750 1250 7000

Overhead (per unit) 94.95 79.07 69.21

(8 Marks)
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Ans-4.

(i) Traditional Costing Method

Support Cost as % of COGS=

Statement showing calculation of operating income and operating income as a% of revenues for
each product line under Traditional Costing System

Amount in Rs.

Particulars Soft drinks Fresh produce Package Food

Revenue 7,93,500 21,00,600 12,09,900

Less: Cost of Goods sold (6,00,000) (15,00,000) (9,00,000)

Less: Store Support Cost (1,80,000) (4,50,000) 2,70,000

Operating Income 13,500 11,50,600 39,900

Operating income % 1.70 7.17 3.30

(ii) Activity Based Costing Method:

Statement Showing Computation of cost drive rate

Types of cost Amount of cost Cost driver Units of cost Cost driver
(Rs) (A) driver (B) rate (Rs)

(A) (B)

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 Ordering 1,56,000 No. of Purchase order 1,560 100

Delivery 2,52,000 No. of deliveries 3,150 80

Shelf stocking 1,72,800 Hours of self-stocking 8,640 20

time

Customer Support 3,07,200 No. of items sold 15,36,000 0.2

Statement showing Apportionment of Overheads under Activity Based Costing

Amount in Rs

Particular Cost Driver Soft drinks Fresh Produce Package Food

Bottles Returns Direct 12,000 -

Ordering Purchase order 36,000 84,000 36,000

Delivery Deliveries 24,000 1,75,200 52,800

Shelf Stocking Hours of time 10,800 1,08,000 54,000

Customer Support Item sold 25,200 2,20,800 61,200

1,08,000 5,88,000 2,04,000

Statement showing calculate the operating income and operating income as a % of revenues for
each product line

Amount in Rs.

Soft drinks Fresh Produce Package Food

Revenue 7,93,500 21,00,600 12,09,900

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Less: Cost of goods sold (6,00,000) (15,00,000) (9,00,000)

Less: store support cost (1,08,000) (5,88,000) (2,04,000)

Operating Income 85,500 12,600 1,05,900

Operating income% 10.78% 0.6% 8.75%

(iii) On the basis of traditional costing system, it could be started that soft drinks is a less profitable
stream of business. However, on the basis of Activity Based system of costing, soft drinks is a highly
profitable stream of the business. ABC method is a scientific method of apportioning overheads and
hence is more reliable than the traditional costing system the fact is that the soft drinks stream
consume less resources then either fresh produce or package food. Also soft drinks have fewer
deliveries and requires less shelf stocking time.

Family store managers can use ABC information to guide their decision, such as how to allocate a
planned increase in floor space. Pricing decision can also be made in a more informed way with ABC
information.

(10 Marks)

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