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CMA Intermediate · Management Accounting · Activity Based Costing

Ganga Plastics absorbs overhead of ₹8,00,000 on 40,000 machine hours under the traditional method. Product Q uses 5,000 machine hours. Under ABC, Q is charged ₹1,50,000. Which statement is correct?

Traditional costing under-costs Q by ₹50,000. The rate is ₹8,00,000 divided by 40,000 hours, ₹20 per hour, so Q bears ₹1,00,000. ABC assigns ₹1,50,000, so the traditional method understates Q's overhead by ₹50,000.

  1. ATraditional costing under-costs Q by ₹50,000 relative to ABCCorrect
  2. BTraditional costing over-costs Q by ₹50,000 relative to ABC
  3. CTraditional costing under-costs Q by ₹1,50,000
  4. DBoth methods charge Q the same overhead

Explanation

Traditional rate = 8,00,000/40,000 = ₹20 per hour, so Q is charged 5,000 x 20 = ₹1,00,000. ABC charges ₹1,50,000. Traditional costing therefore under-costs Q by ₹50,000. The over-costing option reverses the direction.

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