Management Accounting · Activity Based Costing

ABC Numerical Problems and Product Costing Comparison

Updated 10 October 2026 · Fact-checked

In an ABC numerical, you group overheads into activity cost pools, divide each pool by its cost driver volume to get a rate, and charge each product by the driver units it uses. Then you add prime cost, compute profit, and compare with the traditional rate-based cost to show which products were over or under costed.

Understand ABC Numerical Problems and Product Costing Comparison

Traditional costing spreads all factory overhead on one base, usually direct labour hours or machine hours. This works only when every product uses overhead in proportion to that base. In many firms it does not.

Activity Based Costing (ABC) starts from a different idea: products do not consume overhead directly, they consume activities, and activities consume resources. So you trace overhead to activities first, then to products by how much of each activity a product uses.

Each activity has a cost driver, the measure that causes its cost to rise. Examples: number of setups for setup cost, number of inspections for quality cost, number of material movements for handling cost. Dividing the cost of a pool by the total driver units gives the cost driver rate.

The comparison is the heart of the numerical. Total overhead is the same under both methods. Only the split between products changes. Low-volume, complex products usually take more setups, inspections and movements, so ABC gives them a higher cost. High-volume, simple products get a lower cost. This is called cross-subsidisation under traditional costing.

Because cost changes, profit per product changes, and so can the decision on pricing or product mix. Examiners expect you to calculate and then comment on this.

Key rules to remember

Cost driver rate: Cost driver rate = Cost of activity pool ÷ Total cost driver units; Use the total driver units of all products, not of one product.
Overhead charged to a product: Overhead to product = Σ (Cost driver rate × Driver units used by the product); Do this pool by pool, then add.
Overhead per unit under ABC: Overhead per unit = Total overhead charged to product ÷ Units produced; Divide by units produced, not by driver units.
Traditional overhead rate: Rate = Total overhead ÷ Total base (direct labour hours or machine hours); One single rate for all overheads.
Total cost and profit: Total cost = Prime cost + Overhead; Profit = Sales − Total cost; Total profit of the firm is the same under both methods if all overhead is absorbed.
Cost difference: Difference = ABC cost − Traditional cost; Positive means traditional costing undercosts the product.

How to solve ABC Numerical Problems and Product Costing Comparison questions

Use this order for any ABC numerical. It keeps the working neat and lets you earn step marks even if one figure goes wrong.

1List the overhead pools and their amounts. Check that the pools add up to the total overhead given.
2Identify the cost driver for each pool and write the driver volume for each product, with the total.
3Compute the cost driver rate for each pool: pool cost ÷ total driver units.
4Charge each product: rate × its driver units, pool by pool. Total it and divide by units to get overhead per unit.
5Compute the traditional overhead per unit using the single rate, if the question asks for comparison.
6Prepare a cost and profit statement for each product under both methods: prime cost, overhead, total cost, selling price, profit.
7Cross-check that total overhead charged under ABC equals total overhead given, and that total profit matches under both methods.
8Write the comment: which product was over or under costed, why, and what the management should do.

Quickest way: Table method with a total check

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

Draw one table: rows are pools, columns are rate, Product A, Product B, Total.
Fill driver units first, then rate, then the rupee charge in the same row.
Add the columns. The total column must equal the given overhead. If not, fix the error before moving on.
Take per-unit overhead only at the end by dividing by units.
Write the comparison in two lines: direction of change and the cause (volume, setups, complexity).

Common mistakes in ABC Numerical Problems and Product Costing Comparison

Dividing the pool cost by the driver units of one product instead of all products.
Students read the driver data row by row and stop early.
Fix: Always write the total driver units first. The rate is pool cost ÷ total of all products.
Dividing ABC overhead by driver units instead of units produced to get per-unit cost.
Both are called units in the question.
Fix: Per-unit cost always uses the number of finished units produced or sold, as asked.
Using the wrong driver for a pool, such as machine hours for setup cost.
Students default to the base used in traditional costing.
Fix: Match the driver to what causes the cost. Setup cost goes with number of setups or batches, inspection with number of inspections.
Total overhead under ABC does not match the given total.
A pool is left out or a rate is rounded early.
Fix: Add all product charges and tick them against the given total. Keep rates exact until the end.
Giving the numbers but no comment on the comparison.
Students treat the problem as pure arithmetic.
Fix: Add a short conclusion: which product was undercosted under traditional costing, the reason, and the effect on pricing or product mix.
Adding overhead twice, or leaving out prime cost, in the profit statement.
Per-unit and total figures get mixed.
Fix: Work in one basis, either total or per unit, for the whole statement.

Worked examples

Example 1

Sundaram Components Ltd makes two products, X and Y. X: 10,000 units, prime cost ₹80 per unit, 1 direct labour hour per unit, 2 machine hours per unit, selling price ₹150. Y: 5,000 units, prime cost ₹120 per unit, 2 direct labour hours per unit, 1 machine hour per unit, selling price ₹230. Overheads: Setup ₹3,00,000 (driver: setups; X 10, Y 40); Machining ₹4,00,000 (driver: machine hours); Inspection ₹1,50,000 (driver: inspections; X 20, Y 30). Compute the product cost and profit under (a) traditional costing on direct labour hours and (b) ABC, and comment.

Show the solution

Total overhead = 3,00,000 + 4,00,000 + 1,50,000 = ₹8,50,000.
Traditional: Direct labour hours = X 10,000 + Y 10,000 = 20,000. Rate = 8,50,000 ÷ 20,000 = ₹42.50 per hour.
Traditional overhead per unit: X = 1 × 42.50 = ₹42.50; Y = 2 × 42.50 = ₹85.
ABC rates: Setup = 3,00,000 ÷ 50 = ₹6,000 per setup. Machine hours: X 20,000 + Y 5,000 = 25,000; rate = 4,00,000 ÷ 25,000 = ₹16 per hour. Inspection = 1,50,000 ÷ 50 = ₹3,000 per inspection.
ABC charge to X: setup 10 × 6,000 = 60,000; machining 20,000 × 16 = 3,20,000; inspection 20 × 3,000 = 60,000. Total = ₹4,40,000, so ₹44 per unit.
ABC charge to Y: setup 40 × 6,000 = 2,40,000; machining 5,000 × 16 = 80,000; inspection 30 × 3,000 = 90,000. Total = ₹4,10,000, so ₹82 per unit.
Check: 4,40,000 + 4,10,000 = ₹8,50,000, which equals total overhead.
Cost per unit: Traditional X = 80 + 42.50 = ₹122.50; Y = 120 + 85 = ₹205. ABC X = 80 + 44 = ₹124; Y = 120 + 82 = ₹202.
Profit per unit: Traditional X = 150 − 122.50 = ₹27.50; Y = 230 − 205 = ₹25. ABC X = 150 − 124 = ₹26; Y = 230 − 202 = ₹28.
Total profit: Traditional X = ₹2,75,000; Y = ₹1,25,000. ABC X = ₹2,60,000; Y = ₹1,40,000. Both methods give ₹4,00,000 in total.
Comment: Y needs many setups and inspections but few machine hours. Traditional costing overcosts Y by ₹3 per unit and undercosts X by ₹1.50 per unit. Under ABC, Y is the more profitable product per unit.

Answer: ABC cost per unit: X ₹124, Y ₹202 (traditional: X ₹122.50, Y ₹205). ABC profit: X ₹2,60,000, Y ₹1,40,000 (traditional: X ₹2,75,000, Y ₹1,25,000). Total profit is ₹4,00,000 in both. Traditional costing overstates the cost of Y and understates the cost of X.

Example 2

Kaveri Industries makes two products, P and Q. Overheads: Material handling ₹2,40,000 (driver: material movements; P 40, Q 80) and Setup ₹1,80,000 (driver: setups; P 10, Q 20). Direct labour hours: P 6,000, Q 1,500. Units produced: P 2,800, Q 500. Compute overhead per unit under traditional costing (direct labour hour basis) and under ABC. Which product is undercosted by the traditional method?

Show the solution

Total overhead = 2,40,000 + 1,80,000 = ₹4,20,000.
Traditional: total direct labour hours = 6,000 + 1,500 = 7,500. Rate = 4,20,000 ÷ 7,500 = ₹56 per hour.
Traditional overhead: P = 6,000 × 56 = ₹3,36,000; Q = 1,500 × 56 = ₹84,000. Total = ₹4,20,000.
Traditional per unit: P = 3,36,000 ÷ 2,800 = ₹120; Q = 84,000 ÷ 500 = ₹168.
ABC rates: Material handling = 2,40,000 ÷ (40 + 80) = 2,40,000 ÷ 120 = ₹2,000 per movement. Setup = 1,80,000 ÷ (10 + 20) = 1,80,000 ÷ 30 = ₹6,000 per setup.
ABC charge to P: 40 × 2,000 = 80,000; 10 × 6,000 = 60,000. Total = ₹1,40,000. Per unit = 1,40,000 ÷ 2,800 = ₹50.
ABC charge to Q: 80 × 2,000 = 1,60,000; 20 × 6,000 = 1,20,000. Total = ₹2,80,000. Per unit = 2,80,000 ÷ 500 = ₹560.
Check: 1,40,000 + 2,80,000 = ₹4,20,000.
Difference: Q: 560 − 168 = ₹392 per unit undercosted. P: 120 − 50 = ₹70 per unit overcosted.
Comment: Q is a low-volume product that needs many movements and setups. The labour hour base hides this. P was subsidising Q.

Answer: Overhead per unit: Traditional P ₹120, Q ₹168. ABC P ₹50, Q ₹560. The traditional method undercosts Q by ₹392 per unit and overcosts P by ₹70 per unit.

Exam tips

Show the pool-wise table with rate and charge for each product. Examiners award marks for each rate and each charge.
Always do the total check against given overhead. It catches most errors in under a minute.
When the question says compare, write at least two lines of comment: which product moves, why, and what management should do about pricing or mix.
Read the question for the traditional base. It may be direct labour hours, machine hours or units, so do not assume.
In MCQs on ABC, compute only the rate and the one product asked. Do not build the full statement.

Practice questions from Activity Based Costing

ABC Numerical Problems and Product Costing Comparison 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 Comparison: frequently asked questions

How do I calculate product cost under ABC?

Find the cost driver rate for each activity pool by dividing pool cost by total driver units. Multiply each rate by the driver units the product uses and add these charges. Add this overhead to prime cost to get total cost, and divide by units for cost per unit.

Why does ABC give a different cost from traditional costing?

Traditional costing spreads all overhead on one base like labour hours. ABC uses several drivers that match what actually causes each cost. Complex, low-volume products consume more setups and inspections, so their ABC cost is higher.

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

No, if all overhead is absorbed and all units produced are sold, total profit is the same. Only the profit of each product changes, because overhead is split differently.

How should I write the comment in an ABC comparison question?

State which product is undercosted and which is overcosted under the traditional method. Give the reason, such as more setups or inspections per unit. Then state the effect, such as a need to review pricing or product mix.