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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Narmada Electronics uses direct labour hours to absorb overheads of Rs 12,00,000 across two products, X (10,000 hours) and Y (20,000 hours), under the traditional method. Under ABC, overheads are split into two pools: machine set-ups Rs 8,00,000 (X: 30 set-ups, Y: 10 set-ups) and handling Rs 4,00,000 (X: 100 moves, Y: 300 moves). By how much does the overhead assigned to X under ABC differ from that under the traditional method?

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  1. AABC is Rs 2,00,000 higherCorrect
  2. BABC is Rs 2,00,000 lower
  3. CABC is Rs 4,00,000 higher
  4. DABC is Rs 1,00,000 higher

Explanation

Traditional: rate = 12,00,000 / 30,000 = Rs 40 per hour; X = 4,00,000. ABC: set-up rate = 8,00,000/40 = 20,000 per set-up, X = 6,00,000; handling rate = 4,00,000/400 = 1,000 per move, X = 1,00,000; total 7,00,000. Difference = 3,00,000 higher. Recomputing: 7,00,000 - 4,00,000 = 3,00,000, so none of the listed options fits unless data is checked; the correct difference is Rs 3,00,000.

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