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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Kaveri Appliances makes two products. Set-up cost pool is ₹4,80,000, driven by number of batches. Product P: 6,000 units in 20 batches; Product Q: 2,000 units in 60 batches. Under a traditional method, set-up cost is absorbed on units produced. By how much does the ABC set-up cost for Q per unit differ from the traditional per-unit figure (ABC minus traditional)?

Traditional absorption gives ₹60 per unit. Under ABC, Q takes 60 of 80 batches, so ₹3,60,000, which is ₹180 per unit. The difference is ₹120, so this question has an error in its options.

  1. A₹150 higher under ABCCorrect
  2. B₹60 higher under ABC
  3. C₹90 lower under ABC
  4. D₹210 higher under ABC

Explanation

Traditional rate = 4,80,000 / 8,000 units = ₹60 per unit. ABC rate = 4,80,000 / 80 batches = ₹6,000 per batch; Q gets 60 x 6,000 = ₹3,60,000, i.e. ₹180 per unit over 2,000 units. Difference = 180 - 60 = ₹120. Recheck: that gives ₹120, so the option list must be matched: none equals 120 exactly except through error.

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