CMA Intermediate · Management Accounting · Activity Based Costing
Rao Electricals Ltd has overheads of ₹6,00,000, absorbed traditionally on 30,000 direct labour hours (Product M 10,000 hours, Product N 20,000 hours). Under ABC, M is assigned ₹3,00,000 of the overheads. By how much does the overhead charged to M change when moving from the traditional method to ABC?
Traditional absorption is ₹20 per labour hour, so M bears ₹2,00,000. Under ABC it bears ₹3,00,000. The overhead charged to M therefore increases by ₹1,00,000, with Product N correspondingly bearing ₹1,00,000 less.
- ADecrease of ₹1,00,000
- BIncrease of ₹1,00,000Correct
- CIncrease of ₹2,00,000
- DDecrease of ₹3,00,000
Explanation
Traditional rate = 6,00,000/30,000 = ₹20 per hour; M = 10,000 × 20 = ₹2,00,000. ABC gives M ₹3,00,000. Change = 3,00,000 − 2,00,000 = ₹1,00,000 increase. N falls correspondingly from ₹4,00,000 to ₹3,00,000.
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