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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Mehta Toys Ltd. produces two products and currently absorbs overheads of ₹6,00,000 on direct labour hours: P uses 4,000 hours and Q uses 2,000 hours. Under ABC, the overheads are driven by 100 batches in total (cost pool ₹6,00,000), of which P used 20 batches and Q used 80 batches. By how much does the overhead charged to Q increase when ABC replaces the labour-hour method?

Overhead charged to Q rises by ₹2,80,000. Under the labour-hour method Q bears ₹2,00,000 at ₹100 per hour for 2,000 hours. Under ABC it bears 80 batches at ₹6,000, which is ₹4,80,000. The difference is ₹2,80,000.

  1. A₹2,80,000Correct
  2. B₹80,000
  3. C₹4,80,000
  4. D₹2,00,000

Explanation

Labour-hour method: rate = 6,00,000/6,000 = ₹100 per hour, so Q gets 2,000 × 100 = ₹2,00,000. ABC: rate = ₹6,000 per batch, Q gets 80 × 6,000 = ₹4,80,000. Increase = 4,80,000 − 2,00,000 = ₹2,80,000. ₹4,80,000 is the ABC figure itself, not the change.

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