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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Bharat Gears Ltd. produces 1,000 units of X and 3,000 units of Y. Traditional costing absorbs overheads of Rs 8,00,000 on direct labour hours: X uses 2 hours per unit and Y uses 2 hours per unit. Under ABC, the overheads comprise Rs 4,80,000 for batch handling (driver: 48 batches; X has 28 batches, Y has 20) and Rs 3,20,000 for machine running (driver: machine hours; X uses 4,000 and Y uses 4,000). What is the overhead per unit of X under ABC, and how does it compare with the traditional figure?

Overhead per unit of X under ABC is Rs 440, against Rs 200 under traditional costing. Batch handling assigns Rs 2,80,000 and machine running Rs 1,60,000, totalling Rs 4,40,000 over 1,000 units, whereas traditional labour-hour absorption at Rs 100 per hour gives only Rs 200.

  1. ARs 440 per unit, higher than traditional Rs 200Correct
  2. BRs 296 per unit, higher than traditional Rs 200
  3. CRs 440 per unit, higher than traditional Rs 266.67
  4. DRs 300 per unit, higher than traditional Rs 100

Explanation

Traditional: total hours = 2,000 + 6,000 = 8,000, rate Rs 100 per hour, X per unit = Rs 200. ABC: batch rate = 4,80,000/48 = Rs 10,000, X = 28 x 10,000 = 2,80,000. Machine rate = 3,20,000/8,000 = Rs 40, X = 4,000 x 40 = 1,60,000. Total X = 4,40,000, per unit = Rs 440, which is higher than Rs 200. Rs 296 ignores correct batch counts.

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