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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Malabar Services Pvt. Ltd. has a customer order processing activity costing ₹12,00,000 a year. The practical capacity of the activity is 10,000 orders and the cost driver rate is based on practical capacity. In the year, 8,000 orders were actually processed. What amount represents the cost of unused capacity?

The cost of unused capacity is ₹2,40,000. The rate on practical capacity is ₹120 per order, so 8,000 orders absorb ₹9,60,000. The remaining 2,000 orders of idle capacity represent ₹2,40,000, which is the difference from the ₹12,00,000 activity cost.

  1. A₹9,60,000
  2. B₹3,00,000
  3. C₹1,20,000
  4. D₹2,40,000Correct

Explanation

Driver rate on practical capacity = 12,00,000 / 10,000 = ₹120 per order. Cost assigned to products = 8,000 × 120 = ₹9,60,000. Unused capacity cost = 2,000 × 120 = ₹2,40,000, equal to 12,00,000 − 9,60,000. ₹3,00,000 wrongly uses a rate on actual orders (₹150), which would load idle cost onto products.

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