CHAPTER 4: ACTIVITY BASED COSTING CAF 3: CMA

6. COMPREHENSIVE EXAMPLES
 Example 01:
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
AT A GLANCE

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
SPOTLIGHT

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

STICKY NOTES

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.

104 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

 CAF 3: CMA CHAPTER 4: ACTIVITY BASED COSTING

 Example 02:
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
AT A GLANCE

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
SPOTLIGHT

Machine hours per unit 0.1

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

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CHAPTER 4: ACTIVITY BASED COSTING CAF 3: CMA

 Example 03:
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

AT A GLANCE
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

SPOTLIGHT
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

STICKY NOTES
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.

106 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN