N = [(Rs 157500 × 11000)/15000)]/3125 units = Rs 36.96 pu Particulars M N Direct Material per unit 300.00 450.00 Direct Labour 450.00 600.00 750.00 1050.00 Add : Budgeted overheads pu Order Processing 49.00 28.00 Machine Processing 161.00 151.20 Product Inspection 16.80 226.80 36.96 216.16 Total Cost pu 976.80 1266.16 (iii) Statement Showing difference in cost pu Particulars M N Total Cost p.u (a) Under Activity Based Costing Metod 976.80 1266.16 (b) Under direct labour hour method 936.38 1298.50 Over Stated/Under Stated (40.42) 32.34 (iv) The absorption of overheads under activity based costing helps in ascertainment in production cost incurred,since the apportionment of overheads relates the activities that bring out the production. There will be least cost distortion if ABC method is usedinstead of blanket absorption rate ie. direct labour hour rate of overhead absorption. Q. 3. B Ltd manufactures two types of bags-L & T Both bags are produced on the same equipment and use similar processes..The following budgeted data has been obtained for the year ended 31 st December 2009. Product L T Production Quantity 25,000 2,500 Number of Purchase Orders 400 200 Number of Set ups 150 100 Resources required per unit L T Direct Material (Rs) 25 62.5 Direct Labour (hours) 10 10 Machine Time (hours) 5 5
7 Group-IV : Paper-15 : Management Accounting -Enterprise Performance Management DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA Budgeted Production overheads for the year have been analyzed as follows : Rs Volume Related Overheads 2,75,000 Purchase Related Overheads 3,00,000 Set up Related Overheads 5,25,000 The budgeted wage rate is Rs 20/- per hour. The cos present system is to absorb overheads by product units using rates per labour hour. However, the company is considering implementing a system of activity based costing.An activity baseinvestigation revealed that the cost drivers for the overhead costs are as follows : Volume Related Overhead Machine Hours Purchase Related Overhead No of Purchase Orders Set up related Overheads No of Set ups Calculate the unit cost for each type of bag using (i) The current absorption Costing method (ii) The proposed activity based costing approach Compare your results and briefly comment on your findings. Answer 3. Product L T Total Production Quantity 25,000 2,500 Direct Labour hours required 250,000 25,000 275000 Total Production Overhead Rs 11,00,000 Overhead absorption rate per labour hour Rs 4.00 Machine hours required 125,000 12,500 1,37,500 Total Puchase Order 400 200 600 Total Set ups 150 100 250 Cost per cost driver Volume Related Overheads Rs 2,75,000 Machine hours required 1,37,500 Volume related overheads/machine hour Rs 2.00 Purchase related overhead Rs 3,00,000 Total Purchase orders 600 Purchase related overheads/order Rs 500 Set ups related overheads Rs 5,25,000 Total Set ups 250 Set up related overheads per set up Rs 2100
8 Revisionary Test Paper (Revised Syllabus-2008) DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA (a) (i) Unit cost using existing overhead absorption rate Product L T Rs Rs D. Material 25.00 62.50 D. Labour Cost 200.00 200.00 Overheads (10 lab hrs × Rs 4) 40.00 40.00 Total cost per unit 265.00 302.50 (a) (ii) Unit costs using ABC Product L T Rs Rs D. Material 25.00 62.50 D. Labour Cost 200.00 200.00 Overheads : Volume Related (Rs 2 per machine hour) 10.00 10.00
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