CMA Intermediate · Management Accounting · Activity Based Costing
Rao Auto Parts uses ABC with a machine-setup pool of ₹6,00,000 driven by 400 setups. Under ABM, it plans to cut setups by 25% through a process change costing ₹40,000 per year to run. Setup cost is fully variable with the number of setups. What is the net annual benefit of the change?
The net annual benefit is ₹1,10,000. Each setup costs ₹1,500, and cutting 100 setups saves ₹1,50,000. Deducting the ₹40,000 annual running cost of the process change leaves ₹1,10,000. Ignoring that running cost gives the incorrect ₹1,50,000.
- A₹1,10,000Correct
- B₹1,50,000
- C₹1,90,000
- D₹1,00,000
Explanation
Cost per setup = ₹6,00,000/400 = ₹1,500. Setups reduced = 25% of 400 = 100. Gross saving = 100 x ₹1,500 = ₹1,50,000. Net benefit = ₹1,50,000 - ₹40,000 = ₹1,10,000. The ₹1,50,000 option forgets the running cost of the change.
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