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CMA Intermediate · Management Accounting · Activity Based Costing

Veda Appliances has overheads of ₹10,00,000, made up of a setup pool of ₹6,00,000 (driver: number of setups) and a machine pool of ₹4,00,000 (driver: machine hours). Product A uses 6,000 machine hours and 40 setups. Product B uses 4,000 machine hours and 160 setups. Traditional costing absorbs all overheads on machine hours. Compared with ABC, the overhead assigned to Product B under traditional costing is:

Traditional costing understates Product B's overhead by ₹2,40,000. It gives B ₹4,00,000 on machine hours, whereas ABC gives ₹4,80,000 for setups plus ₹1,60,000 for machine time, totalling ₹6,40,000. B is setup-intensive, so volume-based absorption undercosts it.

  1. AOverstated by ₹2,40,000
  2. BUnderstated by ₹2,40,000Correct
  3. CUnderstated by ₹1,20,000
  4. DUnderstated by ₹4,80,000

Explanation

Traditional: ₹10,00,000/10,000 hrs = ₹100 per hr, so B gets ₹4,00,000. ABC: setup rate = ₹6,00,000/200 = ₹3,000, so B gets ₹4,80,000; machine rate = ₹4,00,000/10,000 = ₹40, so B gets ₹1,60,000; total ₹6,40,000. Traditional assigns ₹4,00,000, which is ₹2,40,000 less than ABC. ₹4,80,000 is only B's setup cost and ignores the traditional charge.

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