Activity Based Costing (ABC)

In the words of Cooper & Kalpan “ABC systems calculate the cost of individual
activities and assign costs to cost objects such as product and services on
the basis of activities undertaken to produce each product”.
Overheads are assigned to activities or grouped into cost pools before they
are charged to cost objects. i.e., products/jobs
Activity – a particular task
Cost drivers – those which cause changes in the cost of the activity
Eg., purchase of material - No or orders placed
No of receipts of materials
No of inspections
Steps in solving
Step 1 – Identify the main activity
Step 2 – creation of cost pool
3 – determination of the activity cost drivers
4 – calculation of the activity cost driver rates
ACDR = total cost of activity / cost drivers
5 – charging the costs of activities to products.

MAY 2017 – Section C – 10th Question

The budgeted overheads and cost driver volumes of XYZ ltd. are as follows.
Cost pool Budgeted Cost driver Budgeted
Overhead volumes

Material procurement 57200 No. of orders 100

Material handling 24000 No of movements 60

Set-up 40000 No. of set-ups 50

Maintenance 90000 Maintenance hours 900

Quality control 18000 No. of inspection 80

Machinery 72000 No. of machine hours 2400

Page 1 of 3
The company has produced a batch of 250 components of Product X. the
material cost were Rs. 60000 and labour cost Rs.100000, the usage activities of
the said batch are as follows:
Material orders – 10
Maintenance hours – 320
Material movement – 10
Inspection – 15
Set-ups – 13
Machine hours – 800
Calculate cost driver rates and ascertain the cost of the batch of components
of product X using activity based costing.

Solution:

Computation of cost driver rates

Sl.no Particulars Calculations Cost driver rates
(Rs.)

1. Material procurement 57200/100 572

2. Material handling 24000/60 400

3. Set-up 40000/50 800

4. Maintenance 90000/900 100

5. Quality control 18000/80 225

6. Machinery 72000/2400 30

Statement of Cost of Batch 250 components of Product X

Direct materials 60000

Direct labour 100000

Prime cost 160000

Page 2 of 3
Overhead:
Material 572 x 10 5720
procurement

Material handling 400 x 10 4000

Set-up 800 x 13 10400

Maintenance 100 x 320 32000

Quality control 225 x 15 3375

Machinery 30 x 800 24000

Total cost 239495

Page 3 of 3
CHANDRAKALA.A
Assistant professor of commerce
GFGC, Magadi

Question paper problems continued

May 2017 – Section C – 9th Question
The standard mix to produce one unit of product is as follows:
Material A 60 units at Rs.15 per unit = 900
Material B 80 units at Rs. 20 per unit = 1600
Material C 100 units at Rs.25 per unit = 2500
240 units 5000
During the month of April 100 units were actually produced and consumption
are as follows:
Material A 6400 at 17.50 per unit = 112000
Material B 9500 at 18.00 per unit = 171000
Material C 8700 at 27.50 per unit = 239250
24600 units 522250
Calculate all material variances.
Solution:
Material Standard – 100 units Actual – 100 units

Qty. Rate Amount Qty. Rate Amount

Material 6000 15 90000 6400 17.50 112000

A (60*100)

Material 8000 20 160000 9500 18.00 171000

B (80*100)

Material 10000 25 250000 8700 27.50 239250

C (100*100)

24000 500000 24600 522250

units units

1
 1. Material Cost variance = Standard cost(SC) – Actual Cost (AC)
=500000 – 522250
= Rs.22250(A)

2. Material Price variance = (SP – AP) x AQ

MPV – A = (15 – 17.50) x 6400 = -2.50 X 6400 = 16000(A)
MPV – B = (20 – 18) x 9500 =2 x 9500 = 19000(F)
MPV – C = (25 – 27.50) x 8700 = -2.50 x 8700 = 21750(A)
18750(A)

3. Material usage variance = (SQ – AQ) x SP

MUV – A = (6000 – 6400) 15 = -400 x 15 = 6000(A)
MUV – B = (8000 – 9500) 20 = -1500 x 20 = 30000(A)
MUV – C = (10000 – 8700) 25 = 1300 x 25 = 32500(F)
3500(A)

Verify:
MCV = MPV + MUV
22250(A) = 18750(A) + 3500(A)
22250(A) = 22250(A)

4. MMV = (RSQ – AQ) SP

Where, RSQ = SQ of one material x Total AQ / Total SQ

RSQ – A = 6000 x 24600 / 24000 = 6150 units

RSQ – B = 8000 x 24600 / 24000 = 8200 units
RSQ – C = 10000 x 24600/24000 = 10250 units

MMV – A = (RSQ – AQ) SP

= (6150 – 6400) 15 = 3750(A)

MMV – B = (8200 – 9500) 20 = 26000(A)
MMV – C = (10250 – 8700) 25 = 38750(F)
9000(F)

5. MYV = (Actual yield – Standard Yield) x Standard cost per unit of output

Where, Standard yield = Actual yield/total standard quantity x total

actual quantity
= 100/24000 x 24600
= 102.5

2
 Standard cost per unit of output = total standard cost/total
standard output
= 500000/100
= Rs.5000 per unit

Therefore, MYV = (100 – 102.5) 5000 = -2.5 x 5000 = 12500(A)

Verify
MUV = MMV + MYV
3500(A) = 9000(F) + 12500(A)
3500(A) = 3500(A)

- May 2019 – Section C – 9th question

The information regarding consumption and the weekly wage rates of labour
force engaged on a job scheduled to be completed in 60 weeks are as follows:
Types of Standard Actual
labour No. of Weekly wage No. of Weekly wage
workers rate per workers rate per
hour(Rs.) hour(Rs.)
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20

The work completed in 62 weeks

Calculate:
a) Labour cost variance
b) Labour rate variance
c) Labour efficiency variance
d) Labour Mix variance
Solution:
Category Standard Actual
of Weeks (std. Rate Amount Weeks (Act. Rate Amount
workers time) time)
(No. of (No. of
workers * workers* no.
No. of of weeks)
weeks)
Skilled 75*60 = 4500 60 270000 70*62 = 4340 70 303800

Semi- 45*60 = 2700 40 108000 30*62 = 1860 50 93000

skilled

Unskilled 60*60 = 3600 30 108000 80*62 = 4960 20 99200

3
 10,800 486000 11,160 496000

Calculations of Variances
1. LCV = Standard cost – Actual cost
= 486000 – 496000
= 10000(A)

2. LRV = (Standard rate – Actual rate) Actual time

Skilled = (60 – 70) 4340 = -10 x 4340 = 43400(A)
Semi-skilled = (40 – 50) 1860 = -10 x 1860 = 18600(A)
Unskilled = (30 – 20) 4960 = 10 x 4960 = 49600(F)
12400(A)

3. LEV = (Standard time – Actual time) Standard rate

Skilled = (4500 – 4340) 60 = 160 x 60 = 9600(F)
Semi-skilled = (2700 – 1860) 40 = 840 x 40 = 33600(F)
Unskilled = (3600 – 4960) 30 = -1360 x 30 = 40800(A)
2400(F)

Verify
LCV = LRV + LEV
10000(A) = 12400(A) + 2400(F)
10000(A) = 10000(A)

4. LMV = (RST – Actual time) Standard rate

Where, RST = Standard time of grade/Total standard time * Total actual

time
RST – Skilled = 4500/10800*11160 = 4635
Semi-skilled = 2700/10800*11160 = 2781
Unskilled = 3600/10800*11160 = 3708

LMV –
Skilled = (4635 – 4340) 60 = 295*60 = 17700(F)
Semi-skilled = (2781 – 1860) 40 = 921*40 = 36840(F)
Unskilled = (3708 – 4960) 30 = -1252*30 = 37560(A)
16980(F)

4
May 2017 – Section C – 7th question
From the following information prepare a Flexible Budget and estimate profit
at 60% and 80% capacity.
Capacity 50%
Volume 10000units
Selling price per unit Rs.200/-
Material per unit Rs.100/-
Labour per unit Rs.30/-
Factory overheads per unit Rs.30(Rs.12 fixed)
Administration overhead per unit Rs.20 (Rs.10 fixed)
At 60% capacity material cost per unit increased by 2% and selling price per
unit falls by 2%. At 80% capacity material cost per unit increases by 5% and
selling price per unit falls by 5%.
Solution:
Working:- 50% - 10000 units,
60% =?? 60 x 10000/50 = 600000/50 = 12000units
80% =?? 80 x 10000/50 = 800000/50 = 16000 units

Flexible Budget
Items 50% - 10000units 60% - 12000 units 80% - 16000 units

Total Per Total Per unit Total Per unit

unit
Material 1000000 100 102 105
(100*10000) (102*12000) (105*16000)

Labour 300000 30 30 30
(30*10000) (30*12000) (30*16000)

Prime cost
1300000 130
Factory 120000 12 120000 120000
Overhead: (12*10000) (120000/ (120000/
Fixed (Rs. 12) 12000) 16000)

5
 Variable 180000 18 18 18
(Rs.18) (18*10000) (18*12000) (18*16000)

Work
cost/Factory
cost
Administration 10 100000 100000
overhead: 100000 (100000/ (100000/
Fixed (Rs.10) (10*10000) 12000) 16000)

Variable 100000 10 10 10
(Rs.10) (10*10000) (10*12000) (10*16000)
Total cost

Profit

Sales/Selling 200 196 190

Price (196*12000) (200 – (190*16000) (200 –
2%) 5%)

M.N.Arora – 11.26 question

A ltd. maintains margin of safety of 37.5% with an overall contribution to the
sales ratio of 40%. Its fixed costs amount to Rs.500000. Calculate the
following:
1) Break even sales
2) Total sales
3) Total variable cost
4) Current profit
5) New margin of safety if the sale volume is increased by 7 1/2 %

Solution:
1) Break Even Sales = Fixed cost/P/V ratio
= 500000/40%
= Rs. 1250000/-

2) Total sales = B.E Sales + M/S

= 1250000 + 37.5% of Sales ( B.E sales = 100 – M/S)
= Rs.2000000 (1250000 = 100 - 37.5)
(1250000 = 62.50% of Sales)
(1250000/62.50 = Sales)
Rs.2000000

6
 3) Total variable cost = 100 – P/V ratio(contribution to sales ratio)
= 100 – 40%
= 60%
= 60 x 2000000
= Rs.1200000

4) Current profit = Contibution – fixed cost

= Sales – V.C – F.C
= 2000000 – 1200000 – 500000
= Rs.300000

5) New MoS = ??
New Sales = 2000000 + 7.5%
= 2000000 + 150000
= 2150000
New MoS = 2150000 – 1250000
=Rs.900000

7
CHANDRAKALA.A
Assistant professor of Commerce
GFGC, MAGADI

ABZ Co. Ltd. produces three products A, B and Z for which the standard cost
and output are as follows:
Products A B Z
Output(units) 10000 20000 30000
Direct material per unit Rs.50 Rs.40 Rs.32
Direct labour per unit Rs.30 Rs.40 Rs.48
Labour hours per unit 3 4 5
Machine hours per unit 4 4 7
No. of purchase requisitions 600 900 1000
No. of machine set-ups 120 130 150

Production overhead split by departments:

Department X - Rs. 1200000
Department Y – Rs. 1500000
Total = Rs. 2700000
Department X is labour intensive and Y is machine intensive.
Total labour hours in Department X = 200000: Total machine hours in Dept. Y =
500000
Production overhead split by activity:
Receiving and Inspection - Rs.1400000
Production Set up - Rs.1300000
Total = Rs.2700000
No. of batch received/inspected – 2500
No. of batches for set up – 400
You are required to prepare cost statement under traditional absorption
costing and activity-based costing methods. Also compare the result of the
two methods and give your comments.
Solution:
Traditional Method
Calculation of Overhead absorption rate:
Dept. X = 1200000/200000 labour hours = Rs.6 per labour hour
Dept. Y = 1500000/500000 machine hours = Rs. 3 per machine hour

Statement of Cost
Cost per unit
A B Z
Direct Materials 50 40 32

Direct wages 30 40 48

Overhead: 18 24 30
Dept. X (3hrs*Rs.6) (4hrs*Rs.6) (5hrs*Rs.6)

Dept. Y 12 12 21
(4hrs*Rs.3) (4hrs*Rs.3) (7hrs*Rs.3)

Product cost 110 116 131

ABC method
Calculation of Cost driver rates
Receiving and Inspection = 1400000/2500 batches = Rs.560/- per batch
Set – up = 1300000/400 batches = Rs.3250/- per set up
Statement of Cost
Cost per unit
Items A B Z
Direct materials 50.00 40.00 32.00

Direct wages 30.00 40.00 48

Overhead:
Receiving overhead 33.60 25.20 18.67
per unit (560*600)/10000 (560*900)/20000 (560*1000)/30000

Set up per unit 39.00 21.13 16.25

(3250*120)/10000 (3250*130)/20000 (3250*150)/30000

Product cost 152.60 126.33 114.92

May/June 2018 – section C – all questions solved
7th question
The sales and profit for the two years are as follows;
Year Sales(Rs.) Profits(Rs.)
2016 150000 20000
2017 170000 25000
Calculate:
a) P/V Ratio
b) B.E. point in Rupees and units
c) Sales required to earn a profit of Rs.40000/-
d) Margin of Safety at a profit of Rs.125000/-
e) Variable cost of the two years
f) Profit when sales are Rs.180000
Solution:
Working note
Year Sales Profit

2016 150000 20000

2017 170000 25000

Difference 20000 5000

a) P/V Ratio = change in profit/change in sales *100

= 5000/20000*100
= 25%

b) BEP(Rs.) = Fixed cost /P/V Ratio

= 17500/25%
= Rs.70,000

Fixed cost = contribution – profit

= (P/V ratio x sales) – profit
= (25% x 150000) – 20000
= 37500 - 20000
= 17500
c) Sales required to earn a profit of Rs.40000/-
Sales = Fixed cost + Desired profit / P/V Ratio
= 17500 + 40000/ 25%
= Rs.2,30,000/-

d) Margin of Safety at a profit of Rs.125000/-

MOS = Profit / P/V Ratio
= 125000 / 25%
= Rs.5,00,000

e) Variable cost of two years

V.C = Sales – Contribution
Or
V.C = 100 – P/V Ratio
= 100 – 25%
= 75% of Sales

2016 = 75% x 150000 = Rs.1,12,500/-

2017 = 75% x 170000 = Rs. 1,27,500/-

f) Profit when Sales are 1,80,000

Profit = Contribution – Fixed cost
= (P/V Ratio x Sales) – 17500
= 25% x 180000 – 17500
= 45000 – 17500
= Rs.27,500/-

8th Question

A manufacturing company is expecting to have Rs.16000 cash in hand

on 1-4-2018 and it requested you to prepare cash budget for three
months April to June 2018.
The following information is supplied to you.

Month Sales Purchases Wages expenses

February 35000 22000 3000 2500
March 40000 28000 4500 3000
April 48000 30000 4500 3500
May 50000 34000 5500 4500
June 60000 31000 7000 4500
Other information:
1) Period of credit allowed by supplier is two months(purchases)
2) 25% of sales are for cash and the period of credit allowed to
customers is one month(receipts)
3) Delay in payment of wages and expenses is one month
4) Income tax of Rs.14000 is to be paid in June 2018.
Solution:

Cash Budget for three months ending June 2018

Items April May June Total
Opening Balance 16000 28500 41000
Add: Receipts
Cash Sales 12000 12500 15000
(48000*25%) (50000*25%) (60000*25%)
Credit Sales or 30000 36000 37500
Debtors (40000*75%) (48000*75%) (50000*75%)
Total 58000 77000 93500
Less: Payments
Credit Purchase or 22000 28000 30000
Creditors (feb) (march) (april)
Wages 4500 4500 5500
(march) (April) (may)
Expenses 3000 3500 4500
(march)
Income tax ----- ----- 14000
Total 28500 41000 53500

11th question

a) The expenses of budgeted production of 10000units in a factory are

given below:

Particulars Per unit

(Rs.)
Materials(v) 100

Labour(v) 40

Variable overhead 20

Fixed overheads (Rs.100000) 10

Variable expenses (indirect) 4

 Selling expenses (10% fixed) 20

Distribution expenses (20% fixed) 10

Administrative expenses (80000) 8

Total cost per unit 212

Prepare a flexible budget for production of 8000 units including cost

per unit of each item.

Solution:
Flexible Budget

Items of cost 10000 units 8000 units

Total Per Total Per unit
unit
Direct material(v) 1000000 100 800000 100
(10000*100) (8000*100)

Direct labour(v) 400000 40 320000 40

(10000*40) (8000*40)

Variable overhead 200000 20 160000 20

(10000*20) (8000*20)
Fixed overhead 100000 10 100000 12.5
(100000/
8000)

Indirect variable 40000 4 32000 4

expenses (10000*4) (8000*4)

Selling expenses:

Fixed (20*10%) = 2 20000 2 20000 2.5

(10000*2) (20000/
8000)
Variable (20 – 2) = 18 180000 18 144000 18
(10000*18) (8000*18)
Distribution expenses:
20000 2 20000 2.5
Fixed (10*20%) = 2 (10000*2) (20000/
8000)

80000 8 64000 8
(10000*8) (8000*8)
Variable (10 – 2) = 8
Administration 80000 8 80000 10
expenses(fixed) (80000/
8000)
TOTAL 2120000 212 1740000 217.5

b) Calculate the following material variances from the following

information.

1) Material cost variance

2) Material price variance
3) Material quantity variance

Standard price of materials Rs.20 per kg

Standard quantity of materials required per unit of output 12 kg
Value of materials purchased Rs.30000
Actual output 1500 units
Material purchased 6000kg
Opening stock of materials 800kg
Closing stock of materials 1600 kg

Solution:
Given:

Standard Price (SP) = Rs.20/-

Standard Quantity (SQ) = 12kg x 1500(actual output) = 18000kg

Actual Price (AP) = Rs.5/- (30000/6000)

Actual Quantity (AQ) = Opening stock + Purchases – Closing stock

= 800 + 6000 – 1600
= 6800 – 1600
= 5200 kg

MCV = (SQ X SP) - (AQ X AP)

= (18000 X 20) – (5200 X 5)
= 360000 – 26000
= 334000(F)

MPV = (SP – AP) AQ

= (20 – 5) 5200
= 15 X 5200
= 78000(F)
MUV = (SQ – AQ) SP
= (18000 – 5200) 20
= 12800 X 20
= 256000(F)

Verification:

MCV = MPV + MUV

334000(F) = 78000(F) + 256000(F)
334000(F) = 334000(F)