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CMA Intermediate · Management Accounting · Activity Based Costing

Nilgiri Tools has overheads of ₹6,00,000 absorbed on a per-unit basis under traditional costing. It makes 9,000 units of a high-volume product and 1,000 units of a low-volume, complex product. Analysis shows the low-volume product consumes 50% of all activity drivers. Per unit, traditional costing compared with ABC for the low-volume product:

Traditional costing undercosts the low-volume product by ₹240 per unit. It charges ₹60 per unit (₹6,00,000 over 10,000 units), while ABC traces half the overhead, ₹3,00,000, to the 1,000 units, or ₹300 each. The high-volume product is overcosted to compensate.

  1. AUndercosts it by ₹240Correct
  2. BOvercosts it by ₹240
  3. CUndercosts it by ₹300
  4. DUndercosts it by ₹60

Explanation

Traditional rate = ₹6,00,000/10,000 = ₹60 per unit. ABC assigns 50% = ₹3,00,000 to the low-volume product, which is ₹300 per unit over 1,000 units. Difference = 300 − 60 = ₹240 undercosted. The high-volume product is correspondingly overcosted, which is cross-subsidisation.

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