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CMA Intermediate · Management Accounting · Activity Based Costing

Bharat Tools Ltd makes two products, X and Y. Total overheads are ₹4,20,000. Under the traditional method, overheads are absorbed on direct labour hours: X uses 2,000 hours and Y uses 5,000 hours. Under ABC, X is charged ₹1,80,000 of the overheads. What is the change in overhead charged to X when moving from the traditional method to ABC?

Overhead charged to X rises by ₹60,000. The traditional rate is ₹4,20,000 divided by 7,000 hours, or ₹60 per hour, giving X ₹1,20,000. ABC charges X ₹1,80,000, so the difference is an increase of ₹60,000.

  1. AIncrease of ₹60,000Correct
  2. BDecrease of ₹60,000
  3. CIncrease of ₹1,20,000
  4. DDecrease of ₹1,20,000

Explanation

Traditional rate = 4,20,000 / 7,000 hours = ₹60 per hour. X is charged 2,000 x 60 = ₹1,20,000. Under ABC X is charged ₹1,80,000, so the change is 1,80,000 - 1,20,000 = ₹60,000 increase. A decrease of ₹60,000 reverses the direction of the difference.

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