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Strategic Cost Management · Activity Based Cost Management

Activity Based Costing Numerical Problems and Product Costing

Updated 11 October 2026 · Fact-checked

ABC numericals assign overhead to products through activities. Divide each activity's cost pool by its total cost driver quantity to get a rate. Multiply that rate by the driver units each product uses, add the direct costs, and divide by output to get cost per unit. Then compare with the traditional single-rate result.

Understand ABC Numerical Problems and Product Costing

Traditional costing spreads all overhead over products using one base, usually direct labour hours or machine hours. This works only if every overhead rises and falls with that base. In modern plants it does not. Setups, inspections, material movements and order handling depend on how many batches or orders you run, not on how many hours you work.

Activity Based Costing (ABC) fixes this in two stages. First, you group overhead into cost pools, one for each major activity. Second, you charge each pool to products using a cost driver, which is the factor that causes the activity cost, such as number of setups or number of inspections.

The result is a cost driver rate for each activity, for example ₹6,000 per setup. A product that needs many setups picks up many rupees of setup cost. A product made in long runs picks up little. Under traditional costing both would get the same charge per labour hour.

The usual finding is that low-volume, complex products were under-costed and high-volume, simple products were over-costed. Total overhead stays the same under both methods. Only the split between products changes. This is why the profit of one product rises and another falls, while total profit stays unchanged.

Exam questions ask you to compute the rates, work out the cost per unit and profit under ABC, compare with traditional costing, and then give a decision, such as repricing, redesigning or dropping a product.

Key rules to remember

Cost driver rate
Cost driver rate = Cost of the activity pool ÷ Total quantity of the cost driver
Use the total driver quantity across all products, not just one product.
Overhead charged to a product
Overhead for a product = Σ (Driver rate × Driver units used by the product)
Do this for every activity pool, then add the results.
ABC overhead per unit
ABC overhead per unit = Total ABC overhead of the product ÷ Units produced
Divide by units produced, not by units sold, unless the question says otherwise.
Total cost per unit
Cost per unit = Direct material + Direct labour + ABC overhead per unit
Add any other direct cost the question gives.
Traditional overhead rate
Traditional rate = Total overhead ÷ Total volume base (labour hours or machine hours)
One rate for all overhead. Used for comparison.
Profit per unit
Profit per unit = Selling price − Cost per unit
Total profit = profit per unit × units sold.
Cross-check
Total overhead absorbed under ABC = Total overhead absorbed under traditional costing
If the two totals differ, there is an arithmetic error.

How to solve ABC Numerical Problems and Product Costing questions

Use this order for any ABC product costing question. It keeps the working clear and lets the examiner follow your marks.

  1. 1List the overhead pools and the cost driver given for each. Note the total driver quantity for each pool.
  2. 2Compute the cost driver rate for each pool: pool cost ÷ total driver quantity.
  3. 3Make a small table with products across and activities down. Fill in driver units used by each product.
  4. 4Multiply driver units by the rate for every cell. Total each product column to get its overhead.
  5. 5Divide each product's overhead by its output to get overhead per unit. Add direct material and direct labour to get cost per unit.
  6. 6If asked, compute the traditional rate and traditional cost per unit using the single base given.
  7. 7Compute profit or selling price under both methods and show the difference per unit and in total.
  8. 8Check that total overhead matches under both methods. Then write the recommendation in two or three lines.

Quickest way: Table and cross-check method

When to use it: Use it when the question has two or three products and three or more activity pools, and time is short.

  1. Compute all driver rates first and write them in a box at the top.
  2. Build one table with a row for each activity and a column for each product. Calculate row by row.
  3. Total the columns. Add the two column totals and tally them with total overhead. Fix any mismatch before going further.
  4. Divide column totals by output for per-unit overhead. Add direct cost.
  5. For the comparison, compute the traditional rate in one line, then show the difference as 'ABC cost − traditional cost' for each product.
  6. Write the conclusion: which product was over-costed, which was under-costed, and what you would do about it.

Common mistakes in ABC Numerical Problems and Product Costing

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

    Students read the first product's driver number and stop.

    Fix: Add the driver units of all products first. The rate is pool cost ÷ total driver quantity.

  • Dividing overhead by units sold instead of units produced, or the reverse, without reading the question.

    Production and sales figures are both given and look alike.

    Fix: Overhead is charged on production. Use units produced for cost per unit, then use units sold for profit.

  • Showing per-unit figures only and skipping the total cross-check.

    Students are rushing, and per-unit numbers look complete.

    Fix: Multiply per-unit overhead by output and check that the total equals the overhead given. It takes 20 seconds and catches slips.

  • Forgetting to add direct material and direct labour before computing profit.

    Students focus on overhead because that is the new part of the question.

    Fix: Write the cost sheet in the standard format: direct material, direct labour, overhead, total cost, then profit.

  • Stating that ABC changes total profit.

    Students see profits of individual products move and assume the total moves too.

    Fix: Total overhead and total profit are the same when all production is sold. Only the allocation across products changes. Say so in the comparison.

  • Giving a comparison without a recommendation.

    Students stop after the calculation.

    Fix: End with an action: reprice, review the product, cut the driver quantity such as setups, or investigate further. Quote the per-unit difference as evidence.

Worked examples

Example 1

Kaveri Components Ltd makes two products, A and B. Production and sales are 4,000 units of A and 2,000 units of B. Direct material plus direct labour is ₹150 per unit for A and ₹250 per unit for B. Selling prices are ₹250 for A and ₹450 for B. Direct labour hours are 1 hour per unit for A and 4 hours per unit for B. Overheads are: setups ₹2,40,000 (A 10 setups, B 30 setups); machine running ₹3,00,000 (A 6,000 machine hours, B 4,000 machine hours); inspection ₹1,20,000 (A 20 inspections, B 40 inspections). Compute the cost per unit and total profit of each product under (i) traditional costing based on direct labour hours and (ii) ABC. Comment on the result.

Show the solution
  1. Total overhead = 2,40,000 + 3,00,000 + 1,20,000 = ₹6,60,000.
  2. Traditional: direct labour hours = A 4,000 × 1 = 4,000; B 2,000 × 4 = 8,000; total 12,000 hours.
  3. Traditional rate = 6,60,000 ÷ 12,000 = ₹55 per hour.
  4. Traditional overhead per unit: A = 1 × 55 = ₹55; B = 4 × 55 = ₹220. Overhead absorbed: A ₹2,20,000; B ₹4,40,000.
  5. Traditional cost per unit: A = 150 + 55 = ₹205; B = 250 + 220 = ₹470.
  6. Traditional profit per unit: A = 250 − 205 = ₹45, total 4,000 × 45 = ₹1,80,000. B = 450 − 470 = −₹20, total 2,000 × (−20) = −₹40,000. Total profit = ₹1,40,000.
  7. ABC rates: setup = 2,40,000 ÷ 40 = ₹6,000 per setup. Machine = 3,00,000 ÷ 10,000 = ₹30 per hour. Inspection = 1,20,000 ÷ 60 = ₹2,000 per inspection.
  8. ABC overhead for A = 10 × 6,000 + 6,000 × 30 + 20 × 2,000 = 60,000 + 1,80,000 + 40,000 = ₹2,80,000. Per unit = 2,80,000 ÷ 4,000 = ₹70.
  9. ABC overhead for B = 30 × 6,000 + 4,000 × 30 + 40 × 2,000 = 1,80,000 + 1,20,000 + 80,000 = ₹3,80,000. Per unit = 3,80,000 ÷ 2,000 = ₹190.
  10. Cross-check: 2,80,000 + 3,80,000 = ₹6,60,000. Matches.
  11. ABC cost per unit: A = 150 + 70 = ₹220; B = 250 + 190 = ₹440.
  12. ABC profit per unit: A = 250 − 220 = ₹30, total ₹1,20,000. B = 450 − 440 = ₹10, total ₹20,000. Total profit = ₹1,40,000.
  13. Comment: traditional costing over-costs B by ₹30 per unit and under-costs A by ₹15 per unit. B uses many setups and inspections but few machine hours per unit relative to its labour hours, so the labour-hour base distorted its cost.

Answer: Traditional: A ₹205 per unit, profit ₹1,80,000; B ₹470 per unit, loss ₹40,000; total profit ₹1,40,000. ABC: A ₹220 per unit, profit ₹1,20,000; B ₹440 per unit, profit ₹20,000; total profit ₹1,40,000. B appears loss-making under traditional costing but is marginally profitable under ABC, so it should not be dropped on the traditional figures alone.

Example 2

Nilgiri Appliances Ltd makes 1,000 units of X and 500 units of Y. Prime cost is ₹400 per unit for X and ₹600 per unit for Y. Overheads: material handling ₹1,80,000 (driver: material movements, X 300, Y 600); quality testing ₹90,000 (driver: number of tests, X 100, Y 80); power ₹1,20,000 (driver: machine hours, X 2,000, Y 1,000). The company prices at total cost plus 20%. Compute the cost per unit and selling price under ABC and under traditional costing based on machine hours. Explain the effect on pricing.

Show the solution
  1. Total overhead = 1,80,000 + 90,000 + 1,20,000 = ₹3,90,000.
  2. ABC rates: material handling = 1,80,000 ÷ 900 = ₹200 per movement. Testing = 90,000 ÷ 180 = ₹500 per test. Power = 1,20,000 ÷ 3,000 = ₹40 per machine hour.
  3. Overhead for X = 300 × 200 + 100 × 500 + 2,000 × 40 = 60,000 + 50,000 + 80,000 = ₹1,90,000. Per unit = 1,90,000 ÷ 1,000 = ₹190.
  4. Overhead for Y = 600 × 200 + 80 × 500 + 1,000 × 40 = 1,20,000 + 40,000 + 40,000 = ₹2,00,000. Per unit = 2,00,000 ÷ 500 = ₹400.
  5. Cross-check: 1,90,000 + 2,00,000 = ₹3,90,000. Matches.
  6. ABC cost per unit: X = 400 + 190 = ₹590; Y = 600 + 400 = ₹1,000.
  7. ABC selling price at cost plus 20%: X = 590 × 1.20 = ₹708; Y = 1,000 × 1.20 = ₹1,200.
  8. Traditional rate = 3,90,000 ÷ 3,000 = ₹130 per machine hour.
  9. Traditional overhead per unit: X = 2,000 × 130 ÷ 1,000 = ₹260; Y = 1,000 × 130 ÷ 500 = ₹260.
  10. Traditional cost per unit: X = 400 + 260 = ₹660; Y = 600 + 260 = ₹860.
  11. Traditional selling price at cost plus 20%: X = 660 × 1.20 = ₹792; Y = 860 × 1.20 = ₹1,032.
  12. Comment: traditional costing over-costs X by ₹70 per unit and under-costs Y by ₹140 per unit. X is priced ₹84 too high (792 − 708), which may lose customers. Y is priced ₹168 too low (1,200 − 1,032), so the firm earns less than its intended 20% margin on Y.

Answer: ABC: X cost ₹590, price ₹708; Y cost ₹1,000, price ₹1,200. Traditional: X cost ₹660, price ₹792; Y cost ₹860, price ₹1,032. Traditional costing overprices X and underprices Y. The company should use the ABC costs for pricing and review Y's high handling and testing demands.

Exam tips

  • Show the driver rate calculation for each activity as a separate line. Marks are awarded for each correct rate even if a later step goes wrong.
  • Present the allocation as a table with activities down and products across. It is faster to write and easier for the examiner to check.
  • Always cross-check that total overhead under ABC equals total overhead given. If the question also asks for traditional costing, check that too.
  • Read the units carefully: production, sales, batch size and driver units are often all given. Use the figure the step actually needs.
  • In the 14-mark written questions, end with a clear recommendation tied to your numbers, such as repricing a product, reviewing a loss-making line or cutting setups.

Practice questions from Activity Based Cost Management

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 calculate ABC cost per unit?

Compute a rate for each activity by dividing the pool cost by total driver quantity. Multiply each rate by the driver units the product uses and add the results. Divide by units produced to get overhead per unit, then add direct material and direct labour.

Why do ABC and traditional costing give different product costs?

Traditional costing uses one volume-based rate for all overhead. ABC uses a separate rate for each activity, based on what actually causes the cost. Products that use more batch or support activities get a higher charge under ABC.

Does ABC change total profit?

No, not when all units produced are sold and the same total overhead is charged. ABC only changes how overhead is split between products, so individual product profits change but the total stays the same.

What should I write in the comparison part of the answer?

State which product was over-costed and which was under-costed, with the rupee difference per unit. Explain the reason, such as setups or inspections not being linked to labour hours. Then give one decision, such as repricing or reviewing the product.