Question: 1

Having attended a course on Activity Based Costing, you decided to experiment by

applying the principle of ABC to the four products currently made and sold by your
company. Details of the four products and relevant information are given below for the
period:

Products A B C D
Out put in units 120 100 80 120
Cost Per Unit Rs. Rs. Rs. Rs.
Direct Material 40 50 30 60
Direct Labour 28 21 14 21
Machine Hours per unit 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and
are sold in the batches of 10 units.

The production overheads are currently absorbed by using a machine hour rate and the
total of production overheads for the period are analyzed below:
Rs.
Machine Department Cost 10,430
(Rent, Business Rates, Deprecation and Supervision)
Set up cost 5,250
Stores Receiving 3,600
Inspection/Quality Control 2,100
Material handling & Dispatch 4,620

After a detailed analysis of cost and their behaviours you have ascertained the following
cost drivers:

Cost Cost Drivers

Set up cost Number of Production Runs
Store Receiving Requisitions Raised
Inspection/Quality Control Number of Production Runs
Material handling and dispatch Orders Executed

The number of requisitions raised on the store was 20 for each period product and the
number of orders executed was 42, each order being for a batch of a product.

Required:

I. To calculate the total cost of each product if all overhead cost are absorbed on
machine hour basis
II. To calculate the total cost for each product, using activity based costing
III. To calculate and list the unit product costs from I & II above, to show the
difference and to comment briefly on any conclusions which may be drawn and
which could have profit and pricing implications.

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Question: 2

Alpha Production Company produces four products, P, Q, R and S. Data for the past
period are as follows:

No. of Direct Materia Material

Output Machin
Products Productio Labour l Cost Componen
Units e Hours
n Runs Hours Per Unit
Per Unit
t Per Unit
Per Unit Rs.
P 25 3 2 2 30 8
Q 25 4 4 4 75 5
R 250 7 2 2 30 8
S 250 10 4 4 75 6

Direct Labour Cost is Rs. 7.00 per hour.

Factory Overhead Rs.
Short Run Variable Costs 8,250
Lon Run Variable Costs
Scheduling cost 7,680
Set up cost 3,600
Material handling Cost 7,650

Required:
I. Find out the production cost of products P, Q , R and S under activity
based costing and conventional costing using the following further
information;
a. Labour/Machine hour overhead absorption rate be used in
conventional costing
b. Using ABC method with the following cost drivers:

Short Run Variable Costs Machine Hours

Scheduling cost No. of Production Runs

Set up cost No. of Production Runs

Material handling Cost No. of Components

II. Compare the results from the two methods.

Question: 3

The Shore Line Radio Company manufactures the four types of Radios namely, “Red”,
“White”, “Green” and “Pink” using the same plant and process. The following
information relates to the production for the year ended 31st December 1999:

Products Red White Green Pink

Volume (No.) 4,000 3,000 6,000 5,000
Machine Time per unit (hours) 2 3 2 1
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No. of Set-ups 5 15 10 5
No. of Material orders 15 15 5 10
No. of time material was handled 10 20 15 30
No. of Spare parts used 20 20 30 10

The details of total production overhead presently being allocated on a machine hour rate
are as follows:

Rs.
FOH Cost applicable to Machine oriented activities 170,000
Set up cost 70,000
Cost of Material ordering 15,750
Cost of Material Handling 37,500
Administration of Spare parts 92,000

Management of the company is not satisfied with the present allocation of overhead on
the basis of machine hour rate and intends to change the basis to “Activity Based
Costing”.

You are therefore required to:

I. Compute the overhead cost per unit using activity based costing.
II. Compute the overhead cost per unit using machine hour rate.
III. Comment briefly on the differences disclosed between overhead worked out at
“I” and “II” above.

Question: 4

Aslam & Company produces about one hundred products. Its largest selling product is
“X” and smallest selling product is “Y”. Relevant data is give below:

Total
Details Product X Product Y
Products
Units produced per annum 5,000 1,000 50,000
Material cost per unit Rs. 1.00 Rs. 1.00
Direct Labour per unit 15 Min. 15 Min.
Machine time per unit 1 Hour 1 Hour
No. of set ups per annum 24 2 500
No of purchase orders for material 36 6 2,800
No. of times material handled 200 15 12,000
Direct Labour cost per hour Rs. 5.00
Total Machine hours 600,000
Factory overhead costs Rs.
Set up cost 280,000
Purchasing cost 145,000
Materials handling cost 130,000
Machining cost 660,000
1,215,000

Required:
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 a) find out the production cost per unit of product “X” & “Y” under
i. Conventional product costing method using machine hour
absorption rate.
ii. Under activity based costing

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