Skip to content

CMA Intermediate · Management Accounting · Activity Based Costing

Kaveri Industries has overheads of ₹6,00,000, split equally between a setup pool (₹3,00,000) and an inspection pool (₹3,00,000). Setups total 50 (Product X 20, Product Y 30). Inspection hours total 300 (X 100, Y 200). Traditionally, overhead is absorbed on direct labour hours: 20,000 in total, of which X uses 8,000. How does the ABC overhead for X compare with the traditional figure?

Under ABC, Product X is charged ₹2,20,000, which is ₹20,000 less than the ₹2,40,000 given by the traditional labour-hour method. Setup costs at ₹6,000 per setup give ₹1,20,000, and inspection at ₹1,000 per hour gives ₹1,00,000. Traditional absorption at ₹30 per labour hour gives ₹2,40,000.

  1. AABC ₹2,20,000, which is ₹20,000 lower than traditionalCorrect
  2. BABC ₹2,60,000, which is ₹20,000 higher than traditional
  3. CABC ₹2,40,000, which is the same as traditional
  4. DABC ₹2,00,000, which is ₹40,000 lower than traditional

Explanation

The traditional rate is ₹6,00,000 ÷ 20,000 = ₹30 per hour, so X gets 8,000 × 30 = ₹2,40,000. Under ABC the setup rate is ₹6,000 and the inspection rate is ₹1,000 per hour. X gets 20 × 6,000 + 100 × 1,000 = ₹2,20,000, which is ₹20,000 less than traditional.

Did you get it right without looking?

One question tells you little. A timed set on Activity Based Costing shows your real accuracy, how long you take and where you lose marks.

Practise Activity Based CostingFree diagnostic mock

More Activity Based Costing questions