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CMA Intermediate · Management Accounting · Activity Based Costing

Lakshmi Components has overheads of ₹9,00,000. Under the traditional method they are absorbed on machine hours: 30,000 in total, with Alpha using 20,000 and Beta 10,000. Alpha makes 10,000 units and Beta 2,000 units. Under ABC, the setup pool of ₹4,50,000 is driven by 30 setups (Alpha 10, Beta 20) and the machining pool of ₹4,50,000 by machine hours. What is the per-unit effect on Beta's overhead cost in the traditional system relative to ABC?

Beta is undercosted by ₹75 per unit under the traditional method. Traditionally it carries ₹3,00,000 overhead, or ₹150 per unit. ABC assigns ₹3,00,000 for setups plus ₹1,50,000 for machining, totalling ₹4,50,000, or ₹225 per unit. The low-volume product consumes many setups, which volume-based absorption hides.

  1. AUndercosted by ₹75Correct
  2. BOvercosted by ₹75
  3. CUndercosted by ₹150
  4. DUndercosted by ₹225

Explanation

Traditional rate is ₹9,00,000 ÷ 30,000 = ₹30 per hour, so Beta gets ₹3,00,000, or ₹150 per unit. Under ABC, setup is 20 × ₹15,000 = ₹3,00,000 and machining is 10,000 × ₹15 = ₹1,50,000. That totals ₹4,50,000, or ₹225 per unit. The traditional system therefore understates Beta's cost by ₹75 per unit.

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