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Cost and Management Accounting · Activity Based Costing

ABC Numerical Problems and Product Costing

Updated 4 October 2026 · Fact-checked

ABC numericals assign overheads to products through activities. Divide each activity's cost pool by its total cost driver quantity to get a rate, multiply by each product's driver usage, add direct cost, and divide by units. Then compare with traditional costing to see which products were over- or under-costed.

Understand ABC Numerical Problems and Product Costing

Traditional costing spreads all overheads using one base, such as direct labour hours or machine hours. This works only if every product uses overheads in the same proportion as that base. Often it does not.

Activity Based Costing (ABC) starts from a different idea: products consume activities, and activities consume resources. Setting up machines, moving materials, inspecting and placing orders each cost money. The product that triggers more of these activities should bear more of their cost.

In a numerical, you group overheads into cost pools, one per activity. For each pool you pick a cost driver, which is the factor that causes the cost, such as number of setups. The cost driver rate is pool cost divided by total driver quantity. A product's overhead is its driver usage multiplied by the rate.

The usual exam outcome is a comparison. Low-volume, complex products often look profitable under traditional costing but lose money under ABC. High-volume, simple products show the opposite. Total overhead and total profit stay the same under both methods. Only the split between products changes.

Key rules to remember

Cost driver rate
Cost driver rate = Cost of activity pool ÷ Total quantity of cost driver
Use the total driver quantity of all products, not of one product.
Overhead assigned to a product
Overhead of product = Σ (Driver units used by product × Driver rate of that activity)
Do this activity by activity, then add.
Total cost of product
Total cost = Direct material + Direct labour + Direct expenses + ABC overheads
Direct costs are traced directly, not through activities.
ABC cost per unit
Cost per unit = Total cost of product ÷ Units produced
Use units produced or the number of units the question specifies, such as a batch.
Traditional overhead rate
Rate = Total overheads ÷ Total base (labour hours, machine hours or units)
Needed for the comparison with ABC.
Profit check
Total overhead absorbed under ABC = Total overhead absorbed under traditional costing
If these differ, you have made an error.

How to solve ABC Numerical Problems and Product Costing questions

Follow the same sequence for every ABC question. It keeps the working tidy and lets the examiner award step marks.

  1. 1List the activities, their cost pools and the cost driver given for each. Check that the pools add up to the total overhead in the question.
  2. 2Find the total quantity of each cost driver by adding usage across all products.
  3. 3Compute the rate for each activity: pool cost ÷ total driver quantity.
  4. 4For each product, multiply its driver usage by each rate and add to get its total overhead. Show this in a small table.
  5. 5Add direct material, direct labour and other direct costs to get the total cost. Divide by units for cost per unit.
  6. 6If asked, compute traditional cost per unit using the single base given, then calculate profit per unit and total profit under both methods.
  7. 7Check that total overhead under ABC equals the total overhead in the question. Write a one or two line comment on which product was over-costed or under-costed and why.

Quickest way: One-table ABC method

When to use it: Use this in the exam when there are two or three products and three or four activities. It saves time and still shows every step.

  1. Draw one table. Rows are activities. Columns are: pool cost, total driver, rate, then each product's driver units and its cost.
  2. Fill the rate column first. Then the product columns are simple multiplication.
  3. Add the product columns downward. Add them across and tie the total to the given overhead as a check.
  4. For MCQs, look at which product uses more of the expensive drivers. That product's cost per unit rises under ABC, so you can often eliminate options without full working.
  5. Write per-unit figures to the number of decimals the question uses. Do not round the rate midway; round only the final answer.

Common mistakes in ABC Numerical Problems and Product Costing

  • Dividing the pool cost by one product's driver quantity instead of the total.

    Students focus on the product being asked and ignore the other products.

    Fix: Always add driver units across all products first. The rate is a single figure per activity.

  • Applying the traditional rate on top of the ABC rates.

    Students forget that ABC replaces the single base. They add both.

    Fix: Use either ABC or traditional overhead for a given calculation. Only direct costs are common to both.

  • Dividing total product cost by the wrong units, such as batches instead of units.

    Setup and order drivers are batch-based, which confuses the unit base.

    Fix: Underline the unit in the question. Divide the product's total cost by the units produced.

  • Ignoring overheads that have no stated driver, such as a general pool.

    Students assume every cost needs a driver.

    Fix: If the question gives a different base for a pool, such as labour hours or units, use it. Never drop a pool, because the totals must tie.

  • Writing no interpretation in a comparison question.

    Students stop once the numbers are done.

    Fix: State which product was under-costed, by how much per unit, and the effect on profit and pricing.

  • Computing profit using selling price per unit but cost for the whole batch.

    The units mix per unit and total figures.

    Fix: Convert everything to the same basis, either per unit or total, before subtracting.

Worked examples

Example 1

Alpha Ltd makes products X and Y. Overheads are: machine setups ₹2,40,000; material handling ₹1,50,000; inspection ₹90,000. Cost drivers: number of setups (X 20, Y 40); material movements (X 30, Y 70); inspections (X 50, Y 40). Production: X 10,000 units, Y 5,000 units. Direct cost per unit: X ₹100, Y ₹150. Selling price per unit: X ₹140, Y ₹230. Under traditional costing, overheads are absorbed on direct labour hours: X 20,000 hours, Y 10,000 hours. Compute the cost per unit and profit per unit of each product under ABC and under traditional costing.

Show the solution
  1. Cost driver rates. Setups: ₹2,40,000 ÷ 60 = ₹4,000 per setup. Material movements: ₹1,50,000 ÷ 100 = ₹1,500 per movement. Inspections: ₹90,000 ÷ 90 = ₹1,000 per inspection.
  2. Overhead of X: setups 20 × 4,000 = ₹80,000; handling 30 × 1,500 = ₹45,000; inspection 50 × 1,000 = ₹50,000. Total ₹1,75,000.
  3. Overhead of Y: setups 40 × 4,000 = ₹1,60,000; handling 70 × 1,500 = ₹1,05,000; inspection 40 × 1,000 = ₹40,000. Total ₹3,05,000.
  4. Check: ₹1,75,000 + ₹3,05,000 = ₹4,80,000, which equals the total overhead.
  5. ABC overhead per unit: X ₹1,75,000 ÷ 10,000 = ₹17.50. Y ₹3,05,000 ÷ 5,000 = ₹61.
  6. ABC cost per unit: X ₹100 + ₹17.50 = ₹117.50. Y ₹150 + ₹61 = ₹211.
  7. ABC profit per unit: X ₹140 − ₹117.50 = ₹22.50. Y ₹230 − ₹211 = ₹19.
  8. Traditional rate: ₹4,80,000 ÷ 30,000 hours = ₹16 per hour. X overhead = 20,000 × 16 = ₹3,20,000, or ₹32 per unit. Y overhead = 10,000 × 16 = ₹1,60,000, or ₹32 per unit.
  9. Traditional cost per unit: X ₹132, Y ₹182. Traditional profit per unit: X ₹8, Y ₹48.
  10. Total profit check: traditional X ₹80,000 + Y ₹2,40,000 = ₹3,20,000. ABC X ₹2,25,000 + Y ₹95,000 = ₹3,20,000. Total profit is the same.

Answer: Under ABC: X cost ₹117.50, profit ₹22.50 per unit; Y cost ₹211, profit ₹19 per unit. Under traditional costing: X cost ₹132, profit ₹8; Y cost ₹182, profit ₹48. Traditional costing over-costs X and under-costs Y. Y is much less profitable than it appears, because it uses many setups and movements.

Example 2

Beta Ltd makes products P and Q. Overheads: ordering ₹1,20,000 (driver: purchase orders) and testing ₹2,00,000 (driver: test hours). Purchase orders: P 100, Q 300. Test hours: P 1,500, Q 500. Production: P 6,000 units, Q 14,000 units. Each unit of either product takes 1 machine hour. Find the overhead per unit of each product under ABC and under a machine-hour method, and state the difference.

Show the solution
  1. Ordering rate: ₹1,20,000 ÷ 400 orders = ₹300 per order.
  2. Testing rate: ₹2,00,000 ÷ 2,000 hours = ₹100 per test hour.
  3. Overhead of P: ordering 100 × 300 = ₹30,000; testing 1,500 × 100 = ₹1,50,000. Total ₹1,80,000.
  4. Overhead of Q: ordering 300 × 300 = ₹90,000; testing 500 × 100 = ₹50,000. Total ₹1,40,000.
  5. Check: ₹1,80,000 + ₹1,40,000 = ₹3,20,000, which equals ₹1,20,000 + ₹2,00,000.
  6. ABC overhead per unit: P ₹1,80,000 ÷ 6,000 = ₹30. Q ₹1,40,000 ÷ 14,000 = ₹10.
  7. Machine-hour method: total hours = 6,000 + 14,000 = 20,000. Rate = ₹3,20,000 ÷ 20,000 = ₹16 per hour. Each unit gets ₹16.
  8. Difference: P is under-costed by ₹30 − ₹16 = ₹14 per unit under the machine-hour method. Q is over-costed by ₹16 − ₹10 = ₹6 per unit.

Answer: ABC overhead per unit is ₹30 for P and ₹10 for Q. The machine-hour method gives ₹16 for both. P is under-costed by ₹14 per unit and Q is over-costed by ₹6 per unit, because P uses far more testing, which is the costlier activity.

Exam tips

  • Always show the rate table first. Even if your final answer is wrong, the examiner can give marks for correct rates and method.
  • Tie your total ABC overhead to the given overhead. This check catches most arithmetic errors in a minute.
  • In comparison questions, write a short conclusion on which product is cross-subsidised and what the firm should do about pricing or product mix.
  • For MCQs, identify which product uses more of the costlier drivers. Its cost goes up under ABC, which often removes two options quickly.
  • Practise past RTP and MTP style questions with batch-level drivers. Watch the unit basis, since setups and orders belong to batches while the answer is often per unit.

Practice questions from Activity Based Costing

ABC Numerical Problems and Product Costing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ABC Numerical Problems and Product Costing: frequently asked questions

How do I find the cost driver rate in an ABC problem?

Divide the cost of the activity pool by the total quantity of its cost driver across all products. For example, ₹2,40,000 of setup cost with 60 total setups gives ₹4,000 per setup. Do this separately for every activity.

Why does ABC give a different product cost from traditional costing?

Traditional costing uses one base, such as labour hours, for all overheads. ABC uses a separate driver for each activity. Products that use more of the costly activities get a higher cost under ABC, even if they have fewer hours or units.

Does total profit change when I switch from traditional costing to ABC?

No, if all units produced are sold. Total overhead is the same under both methods, so only the split between products changes. If some units remain in closing stock, the profit can differ because of different stock values.

How should I present an ABC answer in the exam?

Start with a table of activities, pools, drivers and rates. Then show overhead per product, total cost, cost per unit and profit. Add a short comment comparing with traditional costing, since this earns marks in comparison questions.