ITEM C350 M350 Total

Units produced and

sold 50,000 100,000
150,000
Direct labor hours 100,000 300,000
used 400,000
Direct labor cost
(Rs) 1,000,000 4,500,000
5,500,000
Number of times
handled 40,000 20,000
60,000
Number of parts 12,000 8,000 20,000
Number of design 2,000 1,000
changes 3,000
Number of product
8,000 6,000
setups 14,000

Cost using Direct

a. Labor hours

Total Overhead cost

(Handling+Design
changes + setups) 11,500,000 Rs

Predetermined OHR
(Total overhead /
number of DL hours) 28.75 Rs

Unit cost Rs
ITEM C350
C350
Direct labor cost 1,000,000 20 Rs

Hours used 100,000 2 Hours

Over head allocated on
the basis of Labor hour
used 28750000 57.5 Rs

Cost 77.5
B. Use of ABC

ITEM C350 Unit cost Rs

C350
Direct labor cost 1,000,000 20 Rs

Number of times
handled 2000000 40 Rs
Number of parts 1440000 28.8 Rs
Number of design
changes 2200000 44 Rs
Number of product
setups 1600000 32 Rs

Total cost 8,240,000 164.8

D Markup using Traditional cost approach

C350 M350

Unit cost 77.5 131.25

25% mark up 19.375 32.8125

Price 96.875 164.0625

Markup using ABC cost approach

C350 M350

Unit cost 164.8 87.6

25% mark up 41.2 21.9

Price 206 109.5

 COST POOL ACTIVITY COSTS Unit activity cost Units

Handling 3,000,000
50 per handle

Number of parts 2,400,000

120 per part

Design changes 3,300,000

1100 per design change

Setups 2,800,000
200 per set up
Total Rs 11,500,000
Total indirect costs
11,500,000
A. Unit cost of C350 = 77.5 and unit cost of M350 = 131.25 using traditional approach

B. Unit cost using ABC: C350 = 164.8 for M350 = 87.6

C: ABC give us an accurate estimate of the job costs because it is able to allocate costs
according to the resources consumed correctly.

D: Pricing with 25% markup in tradional approach: C350: Rs 96.875, M350 : Rs 164
Pricing with 25% markup using ABC : C350 : Rs 206 and M350 = Rs109

Unit cost Rs
Item M350
C350
Direct labor cost 45 Rs

Hours used 3 Hrs

Over head allocated on the

basis of Labor hour used 86.25

Cost 131.25 Rs
 M350 Unit cost Rs M350
Direct labor cost 4,500,000 45 Rs

Number of times
handled 1000000 10 Rs
Number of parts 960000 9.6 Rs
Number of design
changes 1100000 11 Rs
Number of product
setups 1200000 12 Rs

8760000 87.6 Rs
 per handle

per design change

traditional approach

able to allocate costs

75, M350 : Rs 164

s109
 PV ratio
Sales 36000 Units (CM/Sales) 0.3
Unit price 300 Rs
Total sales 10800000 Rs
BEP 21600 Units
BEP in Rs 6480000 Rs
CM at 36000 units 3240000 Rs
CM at BEQ 1944000
a. FC 1944000 Rs

B Profit = CM - FC @36000 1296000 Rs

C CM required for 1647000 profit = FC + Profit

CM 3591000 CM/ unit 90

C Q (CM/CM per unit) 39900 Units

VC 210 Rs

D FC 1944000
BEQ 3600
CM per unit req 540 Rs

Price = CM + VC 750 Rs
 Std cost Flexi Bud
Q 18000 units Q 18000 units
DM per unit DM per unit
(Plastic) 10 Kg (Plastic) 10 Kg
DM per Kg DM per Kg
(Plastic) 225 Rs (Plastic) 225 Rs
Total used 180000
DM cost DM cost
plastic 40500000 Rs plastic 40500000 Rs

DM per unit DM per unit

(Moulding) 3 feet (Moulding) 3 feet

DM per foot DM per foot

(Moulding) 150 Rs (Moulding) 150 Rs
Total used Total used
(Moulding) 54000 feet (Moulding) 54000 feet
DM cost DM cost
Moulding 8100000 Rs Moulding 8100000 Rs

DL per Unit 4 hr DL per Unit 4 hr

DL Cost per h 300 Rs DL Cost per h 300 Rs

Hrs 72000 Hrs 72000
DL cost 21600000 Rs DL cost 21600000 Rs

Variable oHD 150 Rs Variable oHD 150 Rs

Total V OHD 10800000 Rs Total V OHD 10800000 Rs

Fixed Overhe 2750000 Rs Fixed Overhe 2750000 Rs

Total overhe 13550000 Rs Total overhea13550000 Rs

Plastic material Variance

Price of Plastic fell down, hence it was favorable
to company. But plastic material was inefficiently
Price variance for plastic 45000 F used, implactly unfavourly. Production did not do
Usuage variance for plastic 1125000 U a good job of using material plastic efficiently

Price of Moulding impacted unfacourly because of

Moulding material Variance
Price variance for Moulding
Usuage variance for Moulding
the increase in raw material cost. but usuage was
dowe efficiently. Hence, production manager did a
250000 U good job here.
600000 F Fixed overhead was also decreased . hence very
good for the company.

Labor was used inefficiently.

 the increase in raw material cost. but usuage was
dowe efficiently. Hence, production manager did a
good job here.

Fixed overhead was also decreased . hence very

good for the company.
Fixed Overhead variane 56250 F
Labor was used inefficiently.

Fixed
Overhead
spending
variance 0

Labor Variance

Price variance for Labor 0 Neutral

Efficiency variance for labor 150000 U
 Actual Bud
Q 18000

DM per unit (Plastic) 10.27778

DM per Kg (Plastic) 222.5

Total used 185000

DM cost plastic 41162500 Rs

DM per unit
(Moulding) 2.777778 feet

DM per foot
(Moulding) 155 Rs
Total used
(Moulding) 50000 feet

DM cost Moulding 7750000 Rs

DL per Unit 4.027778 Hrs

DL Cost per hr 300 Rs

Hrs 72500 Hrs
DL cost 21750000 Rs

Variable oHD per hr 155 Rs

Total V OHD 11056250 Rs

Fixed Overhead 2693750 Rs

Total overhead 13750000 Rs

ence it was favorable

aterial was inefficiently
Production did not do
al plastic efficiently

d unfacourly because of
al cost. but usuage was
oduction manager did a

ecreased . hence very

y.
al cost. but usuage was
oduction manager did a

ecreased . hence very

y.
In Traditional costing, product is designed and then costs are estimated, but in target
costing, in the design phase itself, the costing is being targeted. There is a target to
keep the features which are important to the customer and remove the features
which dont add much value to customer.

QSR resturants , before introducing any new meal, can test what features of the meal
are adding value to the costomers. They should rank the Features of mean on the
basis of the value provided to customer. Then, they should find, how much each
feature costs.
Then , reduce the costs of the features which have value index of less than 1.

Hence, this can save costs to the QSR companies by removing the non value added
features or reducing the costs in that area.
P and L

Sales 32000