Page 250 - DCOM206_COST_ACCOUNTING_II

Unit 13: Activity-based Costing

Notes
Particulars Details Rate of Cost Drivers
Material procurement ` 5,80,000 /1100 ` 527
Material handling ` 2,50,000 / 680 ` 368
Set up ` 4,15,000 / 520 ` 798
Maintenance ` 9,70,000 /8400 ` 115
Quality control ` 1,76,000 /900 ` 195
Machine ` 7,20,000 /24,000 ` 30

Calculation of a Batch of 2,600 components of AX - 15
Particulars Details Amount in `
Direct Materials 1,30,000
Direct Labour 2,45,000
Prime Cost – Direct Materials + Direct Labour 3,75,000
Add: Overheads
Material Procurement 26 × ` 527 13,702
Material handling 18 × ` 368 6,624
Set-up cost 25 × ` 798 19,950
Maintenance 690 × ` 115 79,350
Quality control 28 × ` 195 5,460
Machine 1,800 × ` 30 54,000
Total 5,54,086

Note From the above calculations, it is clear that by using Activity-based Costing, there
can be substantial accuracy in the overhead absorption. The overheads are charged on the
basis of cost drivers and not on the basis of absorption rate.

2. A company manufactures two products, X and Y. The product X is a low volume and its
sales are only ` 5,000 p.a. Product Y is high volume and labour intensive, its sales are
25,000 units pa. Product X takes 6 labour hours to make one unit but Y requires 8 hours per
unit. Details of costs for materials and labour for each product are as follows.
Particulars Product X Product Y
Direct Materials – ` 200 100
Direct Labour -@ ` 10 per hour 60 80
Total 260 180

The company works 1,00,000 direct labour hours p.a. Total manufacturing overhead costs are
` 17,50,000 p.a. You are required to compute per unit cost of each product using,
(a) Direct labour hour rate method for absorption of overhead costs and
(b) Activity-based Costing technique for absorption of overhead costs

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