sol_part-1.pdf - Solutions of Activity Based Costing-1Ans 9 The total production overheads are `26,00,000 Product A 10,000 \u00d7 `30 = `3,00,000 Product B

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Unformatted text preview: Solutions of Activity Based Costing -1Ans. 9 The total production overheads are `26,00,000: Product A: 10,000 × `30 = `3,00,000 Product B: 20,000 × `40 = `8,00,000 Product C: 30,000 × ` 50 = `15,00,000 On the basis of ABC analysis this amount will be apportioned as follows: Statement of Activity Based Production Cost Activity Pool Cost Cost Driver Ratio Total Amount A B (`) (`) C 2,96,000 71,040 1,06,560 1,18,400 (`) Stores Receiving Purchase requisition Inspection Production Runs 5:7:8 8,94,000 2,23,500 3,12,900 3,57,600 Dispatch Orders Executed 6:9:10 2,10,000 50,400 75,600 84,000 Machine Setups Set ups 12:13:15 12,00,000 3,60,000 3,90,000 4,50,000 7,04,940 8,85,060 10,10,000 Quantity Sold 10,000 20,000 30,000 Unit Cost 70.49 44.25 33.67 Add: Conversion Cost 80 80 90 Total 150.49 124.25 123.67 Total Cost 6:9:10 Activity Ans 10: (i) Traditional Method `, Cost per Unit P Direct Method Direct Labour Overhead @ `6/Hr on Machine Hour Workings under ABC Product No. of Units P 3000 Q 5000 R 20000 (ii) Activities MC Setup CA. Parag Gupta M Hrs/Unit 10 90 80 60 (10 x6) 230 Q 80 240 108 (18 x 6) 428 R 120 160 84 (14 x 6) 364 Batches Inspection Purchase Order 20 100 60 (3000/150) (20 x 5) (20 x 3) 18 90000 10 40 100 (5000/500) (10 x 4) (10 x 10) 14 280000 20 60 160 (20000/1000) (20 x 3) (20 x 8) 400000 50 200 320 Overhead @ `6/Hr =4L x 6 `24L % 20 M Hrs 30000 [`In ooo’s] Cost Pool C Driver 480 Batches Ph.: +91 9891 432 632 CDQ 50 Batches CDQ Rate(`) 9600 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. -2- Mc Operation Inspection Mat 30 40 10 100 Product Set up cost P 192000 (20 x 9600) 96000 [10x9600] 192000 [20x9600] Q R 720 960 240 2400 M Hrs Inspection Purchase Order 4L 200 320 (iii) Link of overheads Machine Inspection Cost Operation Cost 54000 480000 [30000x1.8] [100x4800] 162000 192000 [90000x1.8] [40x4800] 504000 288000 [280000x1.8] [60x4800] Purchase Order Cost 45000 [60x750] 75000 [100x750] 120000 [160x750] 1.80 4800 750 Total Rate 771000 257 525000 105 1104000 55.2 Cost sheet under ABC Direct Material Direct Labour Overhead P 90 80 257 427 Q 80 240 105 425 R 120.00 160.00 55.20 335.20 Ans. 11: (i) Computation of the activity based overheads Step 1: Compute cost per unit of cost driver = Cost pool / cost driver volume Activity Cost Driver Cost Pool (a) Purchasing Purchase orders `75,000 Setting Batches produced Materials handling Material movements Inspection Batches produced Machining Machine hours Cost driver volume/yr (b) Cost/Unit of cost driver (a)/(b) 1,500 `50/pruchse order `112,000 2,800 `40/batch `96,000 8,000 `12/movement 2,800 `70,000 `150 000 `25/batch 50,000 `3/machine hour Step 2: Compute the volume of cost drivers consumed by Product Nova Shaft Purchase orders (given) = 25 Batches = 15,000/100 = 150 Materials movement = 150 batches × 6 = 900 Machine hours = 15,000 units × 0.1 = 1,500 Step 3: Compute the Activity Based Overheads Cost for Product Nova Shaft Activity Cost Driver Costing Rate / Cost Driver Unit ` CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. -3- Purchasing Purchase orders 50 25 order × `50 `1,250 Setting Batches produced 40 150 batches × `40 `6,000 Material handling Material movements 12 900 movement × `12 Inspection Batches produced 25 150 batches × `25 Machining Machine hours 3 `10,800 `3,750 1,500 hours × `3 `4,500 `26,300 (ii) Computation of budgeted overheads costs for Product Nova Shaft using absorption costing Budgeted overheads = (`75,000 + `96,000 + `112,000 + `70,000 + `150,000) = `503,000 Budgeted absorption cost/machine hour = `503,000 / 50,000 = `10.06 Budgeted machining hours for Product Nova Shaft = 1,500 Budgeted absorbed overhead = 1,500 × `10.06 = `15,090 (iii) Ways in which the company can reduce the ABC for product Nova Shaft: Reduce the number of batches by increasing the batch size which will then reduce the setting up overhead, materials handling and inspection costs. Reduce the number of purchase orders Innovate ways of speeding up production so that the machining hours are reduced. Ans. 12: (a) Sales (i) Units ` Selling price/unit B C Total 25,000 56,000 27,000 1,08,000 18 14 12 4,50,000 7,84,000 3,24,000 12 9 8 2,520 2,810 3,010 Prime Cost ` 3,02,400 5,05,800 2,16,720 Gross Margin (ii v) 1,47,600 2,78,200 1,07,280 (ii) Sales Value (`) (iii) Prime Cost Overhead (iv) No. of units/run (v) (vi) CA. Parag Gupta A Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: 15,58,000 5,33,080 Costing & O.R. -4- Workings: Gross Production/unit /run (1) Defectives/run (2) Good units / run (3) Sales (Goods units)(4) No. of runs (5) Gross Production (6) = (1) (5) Prime Cost / unit (7) Prime Cost (8) ` 2,520 2,810 3,010 20 10 10 2,500 2,800 3,000 25,000 56,000 27,000 10 20 9 25,200 56,200 27,090 9 8 5,05,800 2,16,720 3 4 4 30 80 36 20 12 30 200 240 270 200 300 250 2,000 6,000 2,250 (5) (5) Dye Cost/run (13) Dye cost (14) (13) C 12 M/c hours / run (11) M/c hours (12) = (1) B 3,02,400 Inspection hours/run (9) Inspection hours (10) = (9) A (5) Conventional Accounting System Total Total 10,24,920 146 710 10,250 A B C Sales – units / Production (good units) 1,08,000 25,000 56,000 27,000 Gross Margin (`) 5,33,080 1,47,600 2,78,200 1,07,280 Production overheads (`) 2,25,250 52,141 1,16,797 56,313 Selling Overhead (`) 1,62,000 37,500 84,000 40,500 Sub-Total Overhead (`) 3,87,250 89,641 2,00,797 96,813 Net profit (`) 1,45,830 57,959 77,403 10,467 CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. -5- Ranking II I III Activity Based System Sub-Total Overhead (`) 62,787 2,16,963 1,07,500 Net profit (`) 84,813 61,237 (220) I II III Ranking = `37424 Total Machine hours = Volume × Machine hour required for each period = (500 × ¼) + (5000 × ¼) + (600×1) + (7000 ×3/2) = 12475 hours = `37424/12475 hours = `3 per hour Machine overhead charges = `4355/17 i.e., total number of setups = `256.18 Setup Costs = `1920/10 operations = `192 Material ordering cost = `7580/27 operations = `280.74 Material handling cost = `8600/12 parts = `716.67 Spare parts Ans. 13: (i) Factory overhead applicable to machine oriented activity Products Overheads Items Machine Overhead Setup cost Material ordering cost Material handling cost Spare parts cost A 1/4×`3 = 0.75 B 1/4×`3 = 0.75 C 1× `3 = 3.00 D 3/2×`3 = 4.50 1×256.18/500 = .51 1×192/500=.38 6×256.18/5000=.31 4×192/5000=.15 2×256.18/600=.85 1×192/600=.32 8×256.18/7000=.29 4×192/7000=.29 2×280.74/500=1.12 10×280.74/5000=.56 3×280.74/600=1.40 12×280.74/7000=.48 2×716.67/500=2.87 5×716.67/5000=.72 12×716.67/600=1/19 4×716.67/7000=.41 (ii) Competition of overhead per unit based on two system and their difference Products Machine Setup Material Material Spare overhead ordering handling parts ` Total Old Difference (ABC system system) ` ` ` ` ` A 0.75 0.51 0.38 1.12 2.87 5.63 1.20 +4.43 B 0.75 0.31 0.15 0.56 0.72 2.49 1.20 +1.29 C 3.00 0.85 0.32 1.40 1.19 6.76 4.80 +1.96 D 4.50 0.29 0.11 0.48 0.41 5.79 7.20 -1.41 The traditional system does not make correct assumptions that all overheads are related to volume and machine time. Under traditional system products A and C are under costed because it misallocates costs for small volume products. The activity based costing system recognizes the amount of input to each cost unit. Product B previously avoided its full share of overheads because of its low machine time and may still do so if part of `37425 of machine oriented overhead should be apportioned on some other basis. Product D is overcosted because the additional system loaded it with overhead attributable to activities concerned with products A, B & C as a result of using a volume-based and machine oriented rate which failed to pay proper attention to activity costing. Ans.: 14 (i) Statement of Operating income and Operating income as a percentage of revenues for each product line CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. -6- (When support costs are allocated to product lines on the basis of cost of goods sold of each product) Soft Fresh Packaged Total Rs. Drinks Produce Foods Rs. Rs. Rs. Revenues: (A) 7,93,500 21,00,600 12,09,900 Cost of Goods sold (COGS): 6,00,000 15,00,000 9,00,000 (B) Support cost (30% of COGS): 1,80,000 4,50,000 2,70,000 (C) Total cost: (D) = {(B) + (C)} 7,80,000 19,50,000 11,70,000 Operating income: E= {(A)13,500 1,50,600 39,900 (D)} Operating income as a 1.70% 7.17% 3.30% percentage of revenues: (E/A) x 100) 41,04,000 30,00,000 9,00,000 39,00,000 2,04,000 4.97% Working notes: 1. Total support cost: Rs. 12,000 1,56,000 2,52,000 1,72,800 3,07,200 9,00,000 Bottles returns Ordering Delivery Shelf stocking Customer support Total support cost 2. = Percentage of support cost to cost of goods sold (COGS): Total support cost 100 Total cost of goods sold Rs.9,00,000 Rs.30,00,000 100 = 30% 3. Cost for each activity cost driver: Activity Total cost Rs. (1) (2) Ordering 1,56,000 Delivery Shelf-stocking 2,52,000 1,72,800 Customer support 3,07,200 Cost base (3) allocation Cost driver rate (4)=[(2)÷(3)] 1,560 purchase orders 3,150 deliveries 8,640 hours 15,36,000 sold 100 per purchase order 80 per delivery 20 per stocking hour items 0.20 per item sold (ii) Statement of Operating income and Operating income as a percentage of revenues for each product line CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. -7- (When support costs are allocated to product lines using an activity-based costing system) Soft drinks Fresh Packaged Total Produce Food Rs. Rs. Rs. Rs. Revenues: (A) Cost & Goods sold Bottle return costs Ordering cost* (360:840:360) Delivery cost* (300:2,190:660) Shelf stocking cost* (540:5,400:2,700) 7,93,500 21,00,600 6,00,000 15,00,000 12,000 0 36,000 84,000 Customer Support cost* (1,26,000:11,04,000:3,06,000) Total cost: (B) Operating income C:{(A)(B)} Operating income as a % of revenues 12,09,900 41,04,000 9,00,000 30,00,000 0 12,000 36,000 1,56,000 24,000 1,75,200 52,800 2,52,000 10,800 1,08,000 54,000 1,72,800 25,200 2,20,800 61,200 3,07,200 7,08,000 20,88,000 85,500 12,600 11,04,000 1,05,900 39,00,000 2,04,000 8.75% 4.97% 10.78% 0.60% * Refer to working note 3 Managers believe that activity based costing (ABC) system is more credible (iii) Comment: than the traditional costing system. The ABC system distinguishes with different type of activities at family store more precisely. It also tracks more precisely how individual product lines use resources. Soft drinks consume less resources than either fresh produce or packaged food. Soft drinks have fewer deliveries and require less shelf stocking time. Family store managers can use ABC information to guide their decisions, such as how to allocate a planned increase in floor space. Pricing decision can also be made in a more informed way with ABC information. Ans. 15 (a) Statement showing total cost of different products, assuming absorption of overhead on a machine hour basis Direct material Direct labour* Overhead Cost of production per unit Output in units Total Costs (`) Product A 40 28 80 148 Product B 50 21 60 131 Product C 30 14 40 84 Product D 60 21 60 141 120 17760 100 13100 80 6720 120 16920 No. 21* [email protected] 21 Cost/unit of driver * Rate per machine hour = `26000/1300 hours = `20 Machine Hours = 480 + 300 + 160 + 360 = 1300 hours (b) Cost Drivers ` Setups 5250 Production runs Stores/receiving 3600 Requisitions Inspection/quality 2100 Production runs CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: `250 45 100 Costing & O.R. -8- Handling/dispatch 4620 Orders 42 110 * Production runs = (120/20) + (100/20) + (80/20) + (120/20) @ Requisitions = 20 for each product or 80 in total. It may be pointed out that machine department cost of `10430 will continue to be absorbed on a machine hour basis as before. The relevant absorption rate will be = `10430/1300 = `8.02 per machine hour. Total cost (`) A B C S Direct material 4800 5000 2400 7200 Direct labour 3360 2100 1120 2520 Set-ups 1500 1250 1000 1500 Stores/receiving 900 900 900 900 Inspection/quality 600 500 400 600 Handling/dispatch 1320 1100 880 1320 Machine dept. 3851 2407 1284 2888 costs 16331 13257 7984 16928 Cost per unit 136.09 132.57 99.80 141.07 (c) A B C D Cost per unit (a) 148 131 84 141 Cost per unit (b) 136.09 132.57 99.80 141.07 Difference (11.91) 1.57 15.80 0.07 The total overheads which are spread over the four products have been apportioned on different bases, causing the product cost to differ substantially in respect of products A and C. A change from traditional machine hour rate to an activity based system may have effect on: (a) pricing and profits tot the extent that pricing is based on a ‘cost plus’ approach. (b) Reported profits to the extent that stock levels fluctuate between reporting periods. Ans. 16 (a) Total cost of different products (overhead absorption on Machine hour basis) A B C D ` ` ` ` Direct material 42 45 40 48 Direct labour 10 09 07 08 Overhead 72 54 36 18 Cost of production per unit 124 108 83 74 Out put in unit 720 600 480 504 89,280 64,800 39,840 37,296 Total cost Machine hours (720 Rate per hour = 4 + 600 3 + 480 2 + 504 1) = 6,144 hours. Rs 1,10,592 = `18 per hour. 6,144 hours (b) Activity based costing system Set up Machine operation and maintenance cost of ` 63,000 to be distributed in the ratio of 4: 3: 2. CA. Parag Gupta Ph.: +91 9891 432 632 28,000 Store Inspection receiving 21,000 [email protected] World’s largest CA Final student’s consultancy group: 14,000 Costing & O.R. -9- ` Drivers Cost No Cost per unit of driver (`) 96 500 200 180 250 Set up 48,000 Production runs Store receiving 36,000 Requisitions raised Inspection 24,000 Production runs 96 Orders 192 Material handling and disp 2,592 13.50 Production Run for A (720/24) = 30 ; B (600/24) = 25 ; C (480/24) = 20 ; D (504/24) = 21. A (`) B(`) 30,240 27,000 19,200 24,192 7,200 5,400 3,360 4,032 15,000 12,500 10,000 10,500 Store receiving 9,000 9,000 9,000 9,000 Inspection 7,500 6,250 5,000 5,250 810 675 540 567 Total cost 69,750 60,825 47,100 53,541 Per unit cost 96.875 101.375 98.125 106.23 Direct material Direct labour Setup Material handling and dispatch C(`) D(`) (c) A B C D Cost per unit (a) 124 108 83 74 Cost per unit (b) 96.88 101.38 98.13 106.23 (27.12) (6.62) 15.13 32.23 Difference The total overheads which are spread over the four products have been apportioned on different bases, causing the product cost to differ substantially: in respect of product A and D a change from traditional machine hour rate to an activity system may have effect on price and profits to the extent that pricing is based on cost plus approach. Ans. 17: (a) Budget Cost Statement Activity Activity Cost Activity Driver (`) (Budgeted) 1.ATM Services No. of Units of Activity Driver (Budget) Activity Rate Deposits Loans Credit Cards (`) 8,00,000 ATM Transaction 2,00,000 4 2. Computer Processing 10,00,000 Computer Transaction 20,00,000 0.50 3. Issuing Statements 20,00,000 No. of Statements 5,00,000 4.00 14,00,000 2,00,000 4,00,000 4. Customer Inquiries 3,60,000 Telephone Minutes 7,20,000 0.50 Budgeted Cost CA. Parag Gupta 41,60,000 Ph.: +91 9891 432 632 6,00,000 - 2,00,000 7,50,000 1,00,000 1,50,000 1,80,000 90,000 90,000 29,30,000 3,90,000 8,40,000 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. - 10 - Units of product as estimated in the budget period 58,600 13,000 14,000 50 30 60 Budgeted Cost per unit of the product Working Notes: (i) ATM 4,00,000 + 2,00,000 + 2 × 1,00,000 (ii) Computer (iii) Issuing Statements = 8,00,000 5,00,000 (Fixed = 2,50,000) Variable= 10,00,000 2,50,000 increase to 3 times = 7,50,000 2,00,000 + 80% × 2,00,000 = 2 + 1.6 = 3,60,000 Ans. 18: (a) Working: Calculation of Direct Labour hours: ` Total Indirect Costs (`)* Total Direct labour hours (30,000 + 9,750) 23,85,000 39,750 Rs. 23,85,000 Overhead absorption rate (i) 39,750 hours Rs. 60 per hour Statement showing total manufacturing costs and profits Product B (15,000 units) Product A (60,000 units) Per unit Amount (`) Direct materials Direct labour Prime cost Indirect costs (absorbed on the basis of direct labour hours) Total cost Sales Profit (Sales – Total cost) Per unit 18.75 11,25,000 10.00 6,00,000 28.75 17,25,000 30.00 18,00,000 (18,00,000/ (30,000 hours 60,000 @ `60 per units) hour) 45.00 13.00 58.00 39.00 (5,85,000/ 15,000 units) Total (`) Amount (`) 6,75,000 1,95,000 8,70,000 5,85,000 (9,750 hours 18,00,000 7,95,000 25,95,000 23,85,000 @ `60 per hour) 58.75 63.00 35,25,000 37,80,000 97.00 137.00 14,55,000 20,55,000 49,80,000 58,35,000 4.25 2,55,000 40.00 6,00,000 8,55,000 * Calculation of total Indirect Cost: ` Cleaning and maintenance wages 2,70,000 Designing costs 4,50,000 Set-up costs 3,00,000 Manufacturing operations cost 6,37,500 Shipment costs 81,000 Distribution costs 3,91,500 Factory Administration Costs 2,55,000 23,85,000 Indirect cost allocation to products A and B: CA. Parag Gupta Ph.: +91 9891 432 632 [email protected] World’s largest CA Final student’s consultancy group: Costing & O.R. - 11 - Product B Product A Direct labour hours 30,000 Direct labour hour rate: ` 9,750 60 60 Indirect costs `18,00,000 Output (units) 60,000 5,85,000 15,000 ` Cost per unit of output 39 30 Statement showing the total manufacturing costs and profits using direct labour hour basis of absorption and treating cleaning and maintenance cost as indirect cost: Product A `/unit Product B `/unit Amount Amount Output (units) Total 60,000 15,000 ` ` ` Sales 63.00 37,80,000 137.00 20,55,000 58,35,000 Direct Materials 18.75 11,25,000 45.00 6,75,000 18,00,000 Direct Labour 10.00 6,00,000 13.00 1,95,000 7,95,000 Prime Cost 28.75 17,25,000 58.00 8,70,000 25,95,000 Indirect costs 30.00 18,00,000 39.00 5,85,000 23,85,000 Total costs 58.75 35,25,000 97.00 14,55,000 49,80,000 4.25 2,55,000 40.00 6,00,000 Profit (ii) 8,55,000 Calculation of Setup hours Total Output (in units) Product A Product B 60,000 15,000 240 50 2 hours 5 hours No. of quantity produced per batch Setup time per batch Setup hours (Total) (No. of batches set up time per batch) 60,000 240 2 15,000 = 500 50 5 = 1,500 Calculation of Cost Driver, Rates and summary of indirect cost relating to Product A & B: Activity and Cost Drivers Amount Cost Drivers for Product Activity Cost Rates Indirect Costs (`) B A Cleaning & Maintenance (Direct Labour hours) 2,70,000 30,000 Designing costs (square feet) 4,50,000 30 sq. feet CA. Parag Gupta Ph.: +91 9891 432 632 (Amount / total of cost driver) 9,750 70 sq. feet 39,750 100 [email protected] World’s largest CA Final student’s consultancy group: Product A Product B 6.7925 per Direct labour hour 2,03,775 66,227 4,500 per sq. feet 1,35,000 3,15,000 Costing & O.R. - 12 - Setup costs (setup hours) 3,00,000 500 hours Manufacturing operations costs (molding machine hours) 6,37,500 9,000 81,000 100 Shipment costs (No. of shipments) Distribution costs (area in cubic feet) 3,91,500 Factory administration costs (direct labour hours) 2,55,000 1,500 hours 45,000 cubic feet 2,000 150 per setup hour 75,000 2,25,000 3,750 12,750 50 per molding hours 4,50,000 1,87,500 100 200 405 per shipment 40,500 40,500 22, 500 cubic feet 67,500 5.80 per cubic feet 2,61,000 1,30,500 9,750 39,750 1,92,453 62,547 13,57,728 10,27,274 60,000 15,000 22.63 68.48 30,000 6.4151 per labour hour Production (units) Cost Sheet based on activity based costing system: Product A Description Product B Total cost Per unit ` Sales Total cost ` Per unit ` ` 37,80,000 63.00 20,55,000 137.00 Direct Materials 11,25,000 18.75 6,75,000 45.00 Direct 6,00,000 10.00 1,95,000 13....
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