CMA Intermediate · Management Accounting · Activity Based Costing
Bharat Electricals incurs ₹8,00,000 per year on a rework activity. Of this, 25% is unavoidable even with perfect quality. An ABM initiative reduces avoidable rework by 60%. What annual saving results from the initiative?
The saving is ₹3,60,000. Only the avoidable part of rework, 75% of ₹8,00,000 or ₹6,00,000, can be reduced, and a 60% reduction of that gives ₹3,60,000. Applying 60% to the full cost would wrongly include the unavoidable portion.
- A₹3,60,000Correct
- B₹4,80,000
- C₹1,20,000
- D₹2,00,000
Explanation
Avoidable rework = 75% of ₹8,00,000 = ₹6,00,000. Saving = 60% of ₹6,00,000 = ₹3,60,000. Option ₹4,80,000 wrongly applies 60% to the whole ₹8,00,000, ignoring the unavoidable portion.
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