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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Kaveri Appliances makes two products, X and Y. Traditional absorption uses direct labour hours, with total overhead of ₹6,00,000 and 30,000 labour hours in total (X: 10,000 hours; Y: 20,000 hours). Under ABC, the overhead splits into set-up cost ₹2,40,000 (driver: 60 set-ups; X: 40, Y: 20) and other overhead ₹3,60,000 (driver: labour hours). Production is X: 5,000 units and Y: 10,000 units. What is the overhead per unit of X under ABC, and how does it compare with traditional costing?

Under ABC, X receives ₹1,60,000 of set-up cost and ₹1,20,000 of other overhead, totalling ₹2,80,000 over 5,000 units, which is ₹56 per unit. Traditional costing gives ₹40 per unit. ABC therefore charges more to X because it uses more set-ups.

  1. A₹64 per unit under ABC, against ₹40 traditionallyCorrect
  2. B₹64 per unit under ABC, against ₹20 traditionally
  3. C₹48 per unit under ABC, against ₹40 traditionally
  4. D₹80 per unit under ABC, against ₹40 traditionally

Explanation

Traditional rate = 6,00,000/30,000 = ₹20 per hour; X has 2 hours per unit, so ₹40 per unit. ABC: set-up rate = 2,40,000/60 = ₹4,000, X gets 40 × 4,000 = ₹1,60,000. Other overhead rate = 3,60,000/30,000 = ₹12 per hour, X gets 10,000 × 12 = ₹1,20,000. Total = ₹2,80,000 / 5,000 = ₹56. Rechecking: that gives ₹56, which is not in options, so this item is invalid.

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