ABC Project

“Activity Based Costing” Analysis
Of
HI-TECH ENGINEERING CO.
In partial fulfilment of
The Management Accounting II Course
Submitted to: Prof. Archana Patro
Prepared by: Sonani Jaimish G. (MBA/1091/09)

Bala Gowri sankar (MBA/1015/09)
Pratyush Kumar (MBA/1069/09)
Suraj Jamadar (MBA/1094/09)
Prateek Sonker (MBA/1067/09)
Roshan Kumar (MBA/1076/09)
Nilanjan Chatterjee (MBA/1060/09)
Kuldeep Nagar (MBA/1047/09)
Subhajeet Biswas (MBA/1093/09)
Gurunathan P. (MBA/1031/09)
Group: 4
MBA section A,
1
Contents
Executive summary................................................................................................................................3
Industry Analysis....................................................................................................................................4
Manufacturing Industry.........................................................................................................................4
Organisational Profile............................................................................................................................6
Hi-Tech Engineering Co..........................................................................................................................6
Research Methodology..........................................................................................................................9
Data Collection................................................................................................................................10
Conceptual Framework........................................................................................................................11
Activity-Based Costing.....................................................................................................................11
Concept of Activity-Based-Costing...................................................................................................11
Why use Activity-Based-Costing......................................................................................................12
The ABC Framework........................................................................................................................12
Analysis................................................................................................................................................14
Costing Followed By The Company..................................................................................................15
Calculation Of Cost Per Unit By Activity-Based Costing........................................................................16
1. Purchase of Raw material........................................................................................................16
2. Manufacturing costs................................................................................................................18
3. Inspection................................................................................................................................26
4. Painting....................................................................................................................................28
5. Dispatching..............................................................................................................................30
Findings...............................................................................................................................................31
Suggestions..........................................................................................................................................32
2
Executive summary
Activity-based Costing (ABC), an alternative to traditional cost accounting systems,

records product costs according to activities using relevant cost drivers. It analyzes the causal
linkages between products and the resources utilized in their creation. ABC regularly offers
more precise cost data to help with decision-making on product pricing, product mix, and
buy-or-sell choices.
To illustrate the differences between the two costing approach, Hi-Tech Engineering
Co.'s traditional and ABC's costing systems are compared with their respective impacts on
product costs. This technique helps manage the company's operations more effectively by
providing insightful information about the aspects contributing to the cost.
According to the research, Hi-Tech Engineering Co. employs a traditional costing

method where overheads are directly linked to the product. The price of the UC Range series
four end cover product is ascertained through Activity Based Costing and subsequently
contrasted with the product's cost as determined by Hi-Tech Engineering Co.'s traditional
method. The study claims that the company is overcharging for the products.
Hi-Tech Engineering Co. should use Activity-Based Costing because it helps identify
areas where costs can be decreased or efficiency can be raised, as well as because it
recognizes the actual profitability of the customers, goods, or services.
3
Industry Analysis
Manufacturing Industry
India's manufacturing industry can potentially increase economic growth and generate
employment opportunities. It refers to those industries involved in manufacturing and
processing items to create new commodities and add value. It accounts for a significant share
of the industrial sector in developed countries. The final products are sold as finished goods
to customers or as intermediate goods used in the further production process.
The manufacturing industry has a lot of potential due to a range of factors including
 entrepreneurship, a wealth of industrial knowledge,

 and large market opportunities like exports and localized imports.
 Access to newer technology, driven by creativity, internet, digital transformation,
e-commerce
 Increase in usage of automation and process-driven manufacturing through Artificial
Intelligence, Machine Learning, and Robotics
 Emphasis on Make in India initiatives and promoting companies to produce in India
by giving them incentives, subsidies, PLIs, SEZs, etc.
An economy benefits from manufacturing by employing a large portion of the labour

force and producing materials needed by strategically essential industries like defence and
national infrastructure.
The Compounded Annual Growth Rate for the period (2023-28) is projected to be around
4%.
By 2030, India is expected to be able to export items valued at $1 trillion USD,

positioning itself as a significant global manufacturing powerhouse. By 2025, the Indian
government wants to have 25% of the country's production come from manufacturing
through a variety of programs and regulations.
4
India is currently thought to be the second most popular manufacturing nation. The
driving force behind the growth of country's manufacturing sector is the formation of
industrial clusters, allowing FDI up to 100 per cent, the availability of bank loans to the
industries. Industries need to concentrate on developing innovative goods, grabbing export
opportunities, and focusing on productivity and efficiency through the use of technology in
order to grow at an exponential rate. They should also aim for global volumes to achieve
global cost competitiveness.
5
Organizational Profile
Hi-Tech Engineering Co.
The establishment of Hi-Tech Engineering Co. in Thane, Maharashtra in 1983 was

driven by the desire to manufacture an extensive range of superior sheet metal goods. The
range of items provided caters to industries including engineering, automotive, aerospace,
and electronics. Every product is designed and made using modern technologies. The sheet
metal products are known for their long lifespans, excellent performance, minimal
maintenance requirements, robustness, durability, and sturdiness.
By responding to the shifting needs of the industry, they continuously work to uphold
their reputation as a trustworthy business that more than 5000 active consumers rely on. They
have robust infrastructure facilities that are well-equipped. Furthermore, they developed a
wide range of sheet metal solutions thanks to their vast knowledge and experience. The
organization is divided into various departments that manage the processes related to design,
production, quality assurance, and control. Moreover, the proficiency of their groups and
their business endeavors allow them to manufacture a range of excellent products.
Their portfolio includes,

 Metal laser cutting services.
 CNC laser cutting services.
 Electric golf cart
 Stainless steel laser cutting services.
 Sheet metal fabrication
 Sheet metal bending
 Sheet metal products
 Sheet metal components
 Designer cutting service.
 Fabrication works.
 New items
6
To build the intended product line in accordance with their client's particular demands,
they have set up a high-tech infrastructure unit that is outfitted with all the latest tools and
equipment. They have separated this into divisions like production, quality testing, and
warehousing & packing to make sure that every step runs properly. Furthermore, they have
all the tools necessary to produce high-quality goods quickly.
Company Profile
Name of the Organization: Hi-Tech Engineering Co

Type of Industry: Manufacturing Industry.
Address: Hi-Tech Engineering Co
3, Amrut Industrial Estate,
No. 1, Bilalpada, Vasai East, Vasai - 401208,
Thane, Maharashtra, India
Proprietor : Jay Somani

Established: 1983
Quality Policy at Hi-Tech Engineering Co
1. To fulfil client needs and work toward exceeding their expectations;

2. To handle all activities and associated resources as a process.
3. Establish and uphold an atmosphere where employees are committed to
accomplishing the goals of the company in order to guarantee ongoing development
and progress.
4. Based on data and information analysis, make decisions and carry out required
actions.
5. Involve all of our suppliers in the process of quality improvement to ensure long-term,
mutually beneficial relationships.
7
Products manufactured by Hi-Tech Engineering Co
Components are manufactured as per the customer's requirements. They cater at
present the industries like SS Sheet metal fabrication, steel fabricators, CNC bending
services, MS laser cutting services, Golf car manufacturing, metal cover manufacturing and
MS Jali cutting services
8
Research Methodology
The Study: The present study is an attempt to understand and ascertain the costing
method followed in Hi-Tech Engineering Co and to compare it with the costing method
Activity Based Costing.
Objectives of the study:

 To study the functions and operations of the organization
 To know and understand the existing costing method followed by Hi-Tech
Engineering Co .
 To identify activities involved in manufacturing of UC Range series 4 end cover.
 To identify the cost of the activities involved in manufacturing the product UC Range
series 4 end cover,
 To allocate the cost for the activities.
 To find the cost per unit of the product UC Range series 4 end cover.
 To compare the existing costing method followed by Hi-Tech Engineering Co with
Activity Based Costing
Scope of the study: The scope of this study is to know and understand the various processes
and activities involved in manufacturing Industries, especially in HI-TECH ENGINEERING
CO . It involves finding out the cost per unit of the product UC Range series 4 end cover by
following Activity based Costing.
Need for the study: The theoretical aspects of ACTIVITY BASED COSTING provide the
framework of the study. A conceptual and practical approach is the need of the hour. Hence
the field study becomes an essential part of the curriculum, thus this project study was
conducted to integrate theoretical and practical aspects of Activity based Costing in the
organization.
9
Data Collection
Primary Data
Following are the sources of primary data collected.
 Much of the information was collected from the cost accountant of Hi-Tech
Engineering Co (Mr.Sunil Kundap) .
 Frequent discussions were made with other employees of the company.
 Met a few senior-level executives of the firm.
Secondary Data
 Secondary data was collected through last year’s balance sheet of Hi-Tech
Engineering Co.
 Books on cost accounting were referred.
 Company website
Limitations of the study:

 The study is limited to Hi-Tech Engineering Co only.
 To maintain confidentiality some information could not be disclosed by Hi-Tech
Engineering Co.
10
Conceptual Framework
ACTIVITY-BASED COSTING
With the help of an accounting technique called activity-based costing (ABC), a

company can ascertain the true cost of any good and service it produces, independent of its
organizational structure. 1t is designed to give more precise methods for allocating indirect
and support resource costs to tasks, workflows, goods, services, and clients. ABC systems
understand that a large number of organizational resources are needed for a wide range of
support functions that make it possible to manufacture goods and services for a wide range of
clients, rather than for the actual manufacturing of product units. ABC does not aim to assign
common costs to goods. It aims to measuring and pricing all the resources needed for
operations supporting the creation and provision of goods and services to consumers.
Concept of Activity-Based-Costing:
An organization performs operations in order to conduct business. These operations indicate

the type of business you are in: unpacking boats is one of a ship owner's responsibilities; tax
returns are prepared by an accounting firm; goods are produced by a manufacturer; services
are provided by a council; and students are taught by a university. Resources are used in all
operations. The use of these resources results in an increase in overhead expenses.
Examining the actions necessary to generate the cost of the good or service forms the basis of
activity-based costing. Resources are used in the activities, and their costs are calculable. The
real cost can be ascertained by calculating the quantity of activity needed for each good and
service.
11
Why use Activity-Based-Costing?
Activity-Based-Costing is necessary for the following reasons,

 Understand the true profitability of your customers, products, or services
 Quantify the cost of non-value-added activities such as errors and reworks
 Identify opportunities to reduce costs and/or increase efficiency
 Obtain actionable information to negotiate price increases for unprofitable clients.
 Stratify overhead costs so they can be managed more effectively
The ABC framework
Activity based Costing has been claimed as a method of arriving at more accurate
costs, often to set selling prices. In a market economy, the idea of selling prices based on
costs is dangerous, with serious consequences for a business's competitive stance. With the
variety of conventions and concepts used in cost determination, there are no absolutes in
determining product costs, hence the objective of accurate costs is diluted. However, the
technique of ABC is being seen more as a cost-distortion alarm, more as an attention-
directing tool, more as a cost-management tool.
Activity- Based Costing is a method for understanding the activities, processes and
products of a business; understanding what drives the cost of these activities and processes:
and thus reducing the non-value-adding activities/processes.
Some important terms are explained following
Resource Drivers are the link between resources and activities, assigning costs from the
financial statements.
12
Activity Dnver is the factor used to assign cost from an activity to an object of work; for
instance, if making a sales call is the activity, then the frequency of sales calls to a specific
customer/client would be the activity driver.
Object of Work is the specific objective at the end of a process, for instance, a product, a
satisfied customer/client.
A cost driver is any activity that triggers a cost of something else. Fundamentally there are
two types of Cost Drivers, The Structural Cost Drivers are viz, Scale, Scope, Experience,
Technology, and Complexity. The Exceptional Cost Drivers are viz. Work Force
Involvement, Total Quality Management, Capacity Utilization, Plant Layout, Electricity,
Product Configuration and Exploiting Value
Chain Linkages.
Activities comprise of units, work or tasks. For example, purchase of raw materials, activities
involved in manufacturing, etc.
How does Activity Based Costing differ from traditional cost accounting
systems?
Traditional costing systems use a single parameter

(mostly, direct labour) to assign indirect costs to all products and services. This results
in error in cost data where some of the products are overstated and some are understated.
While ABC assigns costs to activities and products on the basis of resources consumed by it.
By choosing the ABC method over the traditional one, managers get a clearer picture of the
cost of processes and profitability of customers and products.
13
ANALYSIS
Details Of The Product
Product name: UC Range series 4 end cover

Raw Material Requirements for the product
1) Metal sheet of length 125*250*0.12cm
2) Weight of the sheet is 60 kg
3) 42 Covers can be prepared from one metal sheet.
4) Sheets required to prepare 2000 units is 96 sheets,
5) Cost of sheet metal per kg 40 Rs.
6) Weight of a Cover = 60 kg for 42 sheet
=1.42 kg
7) Gross Material cost per unit = 1.42 x Rs 40
= Rs 56.8 per Cover
8) Process Generated Scrap = 0.55 kg
9) Scrap rate = Rs 10/kg
10) Revenue generated from scrap = 0.55 x 10
=Rs 5.5
11) Net material cost = 56.8- 6.5
= Rs 50.3
14
Current Costing System
Product: UC Range series 4 end cover
Number of units produced = 2,00,000 Covers a year
Cost per unit

Particulars Total cost (Rs.) (Rs.)
DIRECT COST
Direct Material (Raw Material
Consumed) ₹ 2,03,82,612.00
Direct Wages ₹ 12,62,382.00
Direct Expenses ₹ 39,71,781.42
Prime Cost ₹ 2,56,16,775.42 ₹ 128.08
FACTORY OVERHEADS
fuel oil & lubricant ₹ 1,05,352.67
Depreciation on machinery ₹ 5,36,568.67
Repairs and maintenance ₹ 2,60,823.33
Insurance ₹ 37,431.33
Rates and Taxes ₹ 1,74,354.67
Indirect material ₹ 11,78,618.40
Factory cost ₹ 22,93,149.07 ₹ 11.47
ADMINISTRATIVE OVERHEADS
Printing and stationery ₹ 46,170.00
Postage and telegram ₹ 12,619.33
Newspapers and magazines ₹ 3,976.00
Professional charges ₹ 18,412.67
Office furniture ₹ 3,764.00
Leave with wages ₹ 4,730.00
Telephone expenses ₹ 1,16,892.00
Salary to partners ₹ 9,73,333.33
Vehicle maintenance ₹ 48,231.33
Sundry expenses ₹ 56,539.33
Salary to staff ₹ 1,72,802.00
Cost Of Goods Sold ₹ 14,57,470.00 ₹ 7.29
SELLING AND DISTRIBUTION
Advertisement expenses ₹ 3,41,000.00
Traveling expenses ₹ 1,24,000.00
Sales Promotion expenses ₹ 55,300.00
Packing charges ₹ 3,42,500.00
Total selling and distribution ₹ 8,62,800.00
Cost Of Sales ₹ 3,02,30,194.49 ₹ 151.15
Profit ₹ 28,60,000.00 ₹ 14.30
Sales ₹ 3,30,90,194.49 ₹ 165.45
15
Calculation Of Cost Per Unit By Activity Based Costing
Production of cover is devided in to following Activities
1. Purchase of raw materials

2. Manufacturing activity
3. Inspection of the covers manufactured
4. Painting
5. Dispatching
Based on the data availed from the company ABC calculation is performed.
1. Purchase of Raw material

Activity Sub activity Cost Driver
Purchase Raw material transport Weight of product
Loading and unloading Weight of product
Storage Weight of product
Material cost Weight of product
a. Raw material transport charges:

Weight of the goods 5000 kgs (for the specified component) of sheet metal
Delivered from supplier to Hi-Tech Engineering Co = Rs.500.00
Therefore, charges per unit = Rs 500/5000 kgs

= Rs 0.10 per kg
Cost of per cover =1.42kg × Rs0.10
= Rs 0.142 per cover
b. Loading and unloading Charges = Rs 310.00/ton

5 Tonn × Rs310 = Rs 1550.00
Therefore, charges for per unit = Rs 1550/5000kgs
= Rs 0.31 per kg
Cost per cover = 1.42 × Rs 0.31
= Rs 0.4402 per cover
16
c. Storage charges = space required 10 × 5ft
Rent 15,000 per month
Building area = 10000sq ft
Storage Cost = 50 sq ft x Rs 1.50
=Rs 75.00 per month
Storage cost per day =Rs 75 for 26 Days
=Rs 2.8846 per day
Storage cost per Cover =Rs 2.8846 for 1000Covers
=Rs 0.0028846 per cover
d. Material cost = 5000 kgs × Rs 50.30 (exclusive of transport and load

unload)
= Rs 2,51,500
= 5000 kgs/1.42wt per kg
= 3521 Covers
= Rs 2,51,500/3521 Covers
= Rs 71.4285 – scrap
= Rs 71.4285 – Rs 5.5
= Rs 69.9285/cover
Total cost incurred for purchase of raw material

Activity Subactivity Cost per cover
Purchase Raw material transport Rs 0.142
Loading and unloading Rs 0.4402
Storage Rs 0.00288
Material cost Rs 69.9285
Total Rs 70.5135
17
2. Manufacturing cost
Activity Sub activity Cost Driver

Manufacturin
g Sharing Manufacturing labor occupied
Circle cutting Man, and machine hour
Deep Drawing Man, and machine hour
Trimming Man, and machine hour
Piercing Man, and machine hour
Cost of each process

a. Sharing
I) Man cover rate = Wages per Covers
= Rs 900 for 1000 Covers
= 0.9 per Cover rate
II) Machine cover rate = Cost of machine × depreciation

= Rs 5,00,000 × 20 % depreciation
= Rs 1,00,000 p.a
= Rs 100,000 for 300 days
= Rs 333.33 per day
= Rs 333.33/ 1000Covers
= Rs 0.3333 per Cover
III) Floor occupied by machine = 100 square feet × Rs 1.5

= Rs 150 p.m
= Rs 150 for 26days
= Rs 5.769/day
= Rs 5.769/1000Covers
= Rs 0.005769/Cover
18
IV) Calculation of electricity
Monthly electricity bill = 31,266
Monthly power consumption = 45 hp
Therefore, Rs 31,266/43 hp = Rs694.8 per hp/ month
Power Consumption = 5 hp
For 5 hp = Rs 694.8 × 5 hp = Rs 3,474
Electricity bill per month = Rs 3474.00
= Rs 3474/26days
=133.61/day
=133.61/1000
= Rs 0.1336/Cover
V) Fuel oil & lubricants = Rs l,58,028 pa

= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
= Rs 21.07/machine
= 21.07/1000Covers
= 0.021/Cover
Total cost of shearing activity

Activity Subactivity Cost per cover
Sharing Man cover rate Rs 0.9000
Machine cover rate Rs 0.3333
Space occupied Rs 0.0076
Electricity Rs 0.1336
Fuel oil & lubricants Rs 0.0210
Total Rs 1.3955
19
b. Circle cutting
I) Man cover rate = Wages / number of Covers
= Rs 200 for 800 Covers
II) Machine cover rate = Rs 100000 × 20% depreciation

= Rs 20000 per year
= Rs 20000 for 300days
= Rs 66.666per day
= Rs 66.666/800Covers
= Rs 0.0833/Cover
III) Space occupied by Machine = 50 Sq ft x Rs 1.5 per sq ft
= Rs 75 p.m
= Rs 75 for 26days
= Rs 2.8846/day
= Rs 2.8846/800Covers
= Rs 0.0036/Cover
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs 31,266/45hp = Rs 694.8 per hp/ month
Power Consumption = 0.5 hp
For 0.5hp = Rs 694.8 x 0.5hp = Rs 3474
= Rs 347.4 for 26days
=13.36 per day
=13.36 for 800Covers
20
V) Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028 for 300days
= Rs 526.76/day
= Rsc21.07 per machine
= 21.07 for 800Covers
= 0.026 per Cover
Total cost of circle cutting activity

Activity Sub activity Cost per cover
Circle cutting Man cover rate Rs 0.2500
Space occupied Rs 0.0036
electricity Rs 0.0167
Total Rs 0.3796
c. Deep drawing
I) Man hour rate = wages/number of Covers
= Rs 385/800 Covers
= Rs 0.4812/Cover
II) Machine hour rate = Cost of machine x Depreciation

= Rs 800000 × 20% depreciation
= Rs 160000 per annum
= Rs 160000 for 300 days
= Rs 533.33/per day
= Rs 533.33/800Covers
21
III) Space occupied by the machine: 100 sq. feet × Rs 1.5 per sq feet
= Rs 150
= Rs 150 for 26 days
= Rs 5.769/day
= Rs 5.769/800Covers
= Rs 0.0072/Cover

Monthly power consumption = 45 hp
Therefore,
Rs 31,266/45hp = Rs 694.8 / hp per month
V) Power Consumption = 7 hp
For 7 hp = Rs 694.8 x 7 hp = Rs 4863.6
= Rs 4863.6/26days
= 187.06/day
= 187.06/800 Covers
VI) Fuel oil & lubricants = Rs l,58,028 per year

= Rs 158028/ 300days
= Rs 526.76/day
= Rs 21.07/machine
= 21.07/800Covers
= 0.026/Cover
Total cost of deep drawing activity
Deep drawing Man cover rate Rs 0.4812
Space occupied by the Rs 0.0072
Total Rs 1.4141
22
d. Trimming
a) Man hour rate = Wages/Total Covers

= Rs 250/500Covers
= Rs 0.5/Cover
b) Machine hour rate = Cost of machine x depreciation

= Rs 300000 × 20% depreciation
= Rs 60000 p.a
= Rs 60000 for 300days
= Rs 200 per day
= Rs 200/500Covers
=Rs 0.4/Cover
c) Space occupied by the machine = 80 Sq ft x Rs 1.5 per sq ft

= Rs 120 per month
= Rs 120 for 26days
= Rs 4.615 per day
= Rs 4.615 for 500Covers
= Rs 0.0057/Cover
d) calculation of electricity
Monthly electricity bill = Rs 31,266
Therefore, Rs 31,266/45hp = Rs 694.8 per hp/ month
Power Consumption = 3hp
For 3hp = Rs 694.8 x 3 hp = Rs 2084.4
= Rs 2084.4/26days
= 80.16/day
= 80.16/500Covers
= Rs 0.16/Cover
23
e) Fuel oil & lubricants = Rsl,58,028 pa
= Rs 158028/ 300days
= Rs 526.76/day
= Rs21.07/machine
= 21.07/500Covers
= 0.042/Cover
Total cost of trimming activity

Activity Sub activity Cost
Trimming Man cover rate Rs 0.5000
electricity Rs 0. 1600
Total Rs 1.1077
e. Piercing
a) Man hour rate
= Rs 300 for 900Covers
= 0.333/Cover
b) Machine hour rate = 400000 × 20% depreciation

= 80000 p.a
= 80000/300days
= 266.66/per day
= 266.66/900Covers
= 0.2962/Cover
c) Space occupied by machine =50 Sq feet × Rs 1.5 per sq ft

= Rs 75 per month
= Rs 75 for 26 days
= Rs 2.8846/day
= Rs 2.8846/900Covers
24
= Rs 0.0032/Cover
d) calculation of electricity
Therefore,
Rs 31,266/45hp = Rs 694.8 per hp/month
Power Consumption = 3hp
For 3hp = Rs694.8 x 3hp = Rs 2084.4
= Rs 2084.4/26days
= 80.16/day
= 80.16/900Covers
= Rs 0.089/Cover
e) Fuel oil & lubricants = Rs1,58,028 p.a

= Rs 1,58,028/ 300days
= Rs 526.76/day
= Rs 21.07/machine
= 21.07/900Covers
= 0.023/Cover
Total cost of piercing activity

Piercing Man cover rate Rs 0.3333
Rs 0.7447
25
Total cost of the processes

Manufacturing Sharing Rs 1.3955
Circle cutting Rs 0.3796
Deep Drawing Rs 1.4141
Trimming Rs 1.1077
Piercing Rs 0.7447
Total Rs 5.0416
3. Inspection
Inspection rate 8% of number of units produced per day

667 Covers x 8% = 54 Covers to be inspected
a) Salary of the inspector = 8000 per month

Time required to inspect = 1 hour
Per day salary = Rs 8000 per 26days
= Rs 307.69/day
Per hour salary = Rs 307.69 for 8hrs
= Rs 38.46/hr
Wages to the inspector = l hr x Rs38.46
= Rs38.46/hr
b) Cost of instruments required to inspect = Rs 9500

The expected life of the instrument is one year
Instruments charges per month = Rs 9500 for 12 months
= Rs 791.667/month
Per day charge = Rs 791.667/26 days
= Rs 30.44/day
Per hour charges = Rs 30.44/8hrs
26
= Rs 3.8/hr
c) Calibration charges per year = Rs 1000

Per month charges = Rs 1000 for 12months
= Rs 83.333/month
Per day charges = Rs 83.333 for 26days
= Rs 3.2 per day
Per hour charges = Rs 3.2/8hr
=Rs 0.400 per hr
Total of inspection activity

Inspection Salary of the inspector Rs 38.46/hr
Instrument for inspection Rs 3.8/hr
Calibration Rs 0.4/hr
Total Rs 42.66/hr
Cost per Cover Rs 0..5116/cover
27
4. Painting
a) Cost of paint and thinner

Paint Rs 300/ltr
Thinner Rs 250/ltr
Divided in the ratio of 70:30
Cost of Paint = Rs 300 x 70/100
= Rs 210
Cost of Thinner = Rs 250 x 30/100
= Rs 75
Cost of mixture total = Rs 210 + Rs 75
= Rs 285
Total Area of component covered by the mixture is 40 sq. feet

Area of the component = 1.72 Sq. ft
Covers that can be painted = 40 Sq ft/1.72sq ft
= 23 Covers
Cost of paint per cover = Rs 285 / 23Covers
= Rs 12.4 per Cover
b) Labour cost
People required for painting = 2
Wages per day = Rs 1600
Covers painted in one day = 667 Covers
Cost per cover = Rs 1600/667 covers
=Rs 2.4/cover
c) Paint booth operation cost = Rs 300000

Deprecation = 25% of the cost
=Rs 300000 × 25%
= Rs 75000 per year
Per month = Rs 75000/12 months
= Rs 6250 p.m
Per day = Rs 6250 for 26days
28
= Rs 240.38 per day
Cost of per cover = Rs 240.38/667 Cover = Rs 0.360/Cover
d) Power charges Rs 5500/month

Total Power consumption = 20 hp
Therefore,
Rs5500/20hp = Rs 275per hp/month
Power consumption = 5 hp
For 5 hp = 5 hp x Rs275
Electricity bill per month for 5hp = Rs 1375
Per day charges = Rs 1375/26days
= Rs 53/day
Per cover charges = Rs 33/200Covers
= Rs 0.265/Cover
e) Area of painting booth = 60 x 20ft

Rent = 20000 p.m.
Built area = 10000 sq ft
Rent per sq. ft = Rs 30000/10000sq ft
= Rs 3/sq. ft/month
Cost of area = 1200 sq ft x Rs3
= Rs 3600
Per day charges = Rs 3600/26
= Rs 138.46/day
Per cover = Rs 138.46/200Covers = Rs 0.692 per cover
Area of the Cover = 1.72sq ft
Cost of per cover = Rs 12.11 x 1.72sq ft
= Rs 20.82/cover
Total cost of painting activity

Painting Cost of paint and thinner Rs 12.4
Labour cost Rs 2.4
Paint booth operation cost Rs 0.360
Power charges Rs 0.265
Area of painting booth Rs 0.692
Total Rs 16.117
29
5. Dispatching
a) Packing charges:
Cost of wooden box = Rs 4000 (inclusive transportation cost, taxes)

Cost of plastic wire = Re 1.00/Cover
Cost of paper = Re 1.50/Cover
Number of Covers packed per box = 150 covers
Rs 4000 + (Re l.00 x 150) + (Re 1.50 x 150) = Rs 4375
b) Labour
People required = 3
5 boxes packed per day
Wages = Rs 250 + Rs 200 + Rs 150
= Rs 600/day
Wages per box = Rs 600/5boxes
= Rs120/box
Total = Rs 4375 + Rs 120
= Rs 4495
Per Cover = Rs 4495 / 200Cover
= Rs 22.475/Cover
Total of dispatching Activity

Despatching Packing charges Rs 4375
labour Rs 120
Total Rs 4495/box
Cost per cover Rs 22.475/Cover
30
Cost Per Unit Of The Product
Cost per Cover
Activity Amount (Rs.)
PURCHASE OF RAW
1 MATERIALS 70.5136
2 MANUFACTURING
Sharing 1.3955
Circle cutting 0.3796
Deep drawing 1.4141
Trimming 1.1077
Piercing 0.7447
Total 5.0416
3 INSPECTION 0.5116
4 PAINTING 16.1170
5 DESPATCHING 22.4750
Grand Total 114.6587
31
Findings
1. Hi-Tech Engineering Co specialises in deep-drawn components that cater for the

electrical, elevator, home appliances, automobile industry and defence.
2. Hi-Tech Engineering Co follows traditional method of Costing.
3. The product UC Range series 4 end cover is over costed.
4. According 1o traditional Costing the cost of the cover is Rs. 165.45
5. According to Activity Based costing, the cost of the cover is Rs 114.65
6. According to Costing, followed by Hi-Tech Engineering Co, they first identify the
cost, then they go for producing the product rather than identifying the activities first
7. Through ABC, appropriate variable overheads are assigned to specific products.
8. All activity levels in the manufacturing cost hierarchy—unit, batch, product, and
facility levels—have been recognized.
9. Cost drivers for the activities have been identified.
10. Hi-Tech Engineering Co relates overheads to cost centres which are not realistic to
the behaviour of costs.
11. To get a realistic analysis of cost behaviour, the overheads have been properly related
to cost drivers.
32
Suggestions
1. Hi-Tech Engineering Co should adopt Activity Based costing in their organization.

2. As ABC integrates well with Six Sigma and continuous improvement programs the
company can achieve minimum rejection rate.
3. To arrive at the actual cost of the product, overheads should not be directly assigned to the
cost centre which is basically done in traditional Costing.
4. Instead of focusing more on cost reduction, they should focus more on cost control.
5. Hi-Tech Engineering Co can adopt cost control strategy where in the company can begin
by evaluating non-labour expenses which can be controlled.
6. Labour and employment costs are a source of considerable expense and should be
constantly monitored.
7. If it is possible 1o amalgamate two jobs into one, make some jobs part time, use temporary
contract labour, outsourcing to specialists, consider if some other choice of labor cost saving
is available.
8. Hi-Tech Engineering Co should follow an open style with clear and concise objective for
the successful implementation of ABC.
9. Organization-wide awareness should be extended to convince the participants to change, as
well as effecting the change.
10. Overheads are part of running a business but can be controlled.
33

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“Activity Based Costing” Analysis

HI-TECH ENGINEERING CO.

The Management Accounting II Course

Submitted to: Prof. Archana Patro

Prepared by: Sonani Jaimish G. (MBA/1091/09)

Activity-based Costing (ABC), an alternative to traditional cost accounting systems,

According to the research, Hi-Tech Engineering Co. employs a traditional costing

 entrepreneurship, a wealth of industrial knowledge,

An economy benefits from manufacturing by employing a large portion of the labour

By 2030, India is expected to be able to export items valued at $1 trillion USD,

Hi-Tech Engineering Co.

The establishment of Hi-Tech Engineering Co. in Thane, Maharashtra in 1983 was

Their portfolio includes,

Name of the Organization: Hi-Tech Engineering Co

Proprietor : Jay Somani

Quality Policy at Hi-Tech Engineering Co

1. To fulfil client needs and work toward exceeding their expectations;

Objectives of the study:

Limitations of the study:

With the help of an accounting technique called activity-based costing (ABC), a

An organization performs operations in order to conduct business. These operations indicate

Activity-Based-Costing is necessary for the following reasons,

The ABC framework

Some important terms are explained following

Traditional costing systems use a single parameter

Details Of The Product

Product name: UC Range series 4 end cover

1) Metal sheet of length 125*250*0.12cm

2) Weight of the sheet is 60 kg

3) 42 Covers can be prepared from one metal sheet.

4) Sheets required to prepare 2000 units is 96 sheets,

5) Cost of sheet metal per kg 40 Rs.

6) Weight of a Cover = 60 kg for 42 sheet

7) Gross Material cost per unit = 1.42 x Rs 40

= Rs 56.8 per Cover

8) Process Generated Scrap = 0.55 kg

9) Scrap rate = Rs 10/kg

10) Revenue generated from scrap = 0.55 x 10

11) Net material cost = 56.8- 6.5

Cost per unit

Sales ₹ 3,30,90,194.49 ₹ 165.45

Production of cover is devided in to following Activities

1. Purchase of raw materials

1. Purchase of Raw material

a. Raw material transport charges:

Therefore, charges per unit = Rs 500/5000 kgs

b. Loading and unloading Charges = Rs 310.00/ton

d. Material cost = 5000 kgs × Rs 50.30 (exclusive of transport and load

Total cost incurred for purchase of raw material

Activity Sub activity Cost Driver

Cost of each process

II) Machine cover rate = Cost of machine × depreciation

III) Floor occupied by machine = 100 square feet × Rs 1.5

V) Fuel oil & lubricants = Rs l,58,028 pa

Total cost of shearing activity

II) Machine cover rate = Rs 100000 × 20% depreciation

Total cost of circle cutting activity

II) Machine hour rate = Cost of machine x Depreciation

IV) Calculation of electricity

VI) Fuel oil & lubricants = Rs l,58,028 per year

a) Man hour rate = Wages/Total Covers

b) Machine hour rate = Cost of machine x depreciation

c) Space occupied by the machine = 80 Sq ft x Rs 1.5 per sq ft

1) Metal sheet of length 1252500.12cm