Module 4 – Activity Based Costing

ILLUSTRATION 1
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C.
The budgeted costs and production for the year ending 31st March, 2020 are as
follows:
Particulars A B C
Production quantity (Units) 4,000 3,000 1,600
Resources per Unit:
Direct Materials (Kg.) 4 6 3
Direct Labour (Minutes) 30 45 60
The budgeted direct labour rate was Rs. 10 per hour, and the budgeted material
cost was Rs. Rs 2 per kg. Production overheads were budgeted at Rs. 99,450 and
were absorbed to products using the direct labour hour rate.
The following additional information is made available for this purpose.
1. Budgeted overheads were analysed into the following:
Particulars (Rs.)
Material handling 29,100
Storage costs 31,200
Electricity 39,150
2. The cost drivers identified were as follows:
Material handling Weight of material handled
Storage costs Number of batches of material
Electricity Number of Machine operations
3. Data on Cost Drivers was as follows:
Particulars A B C
For complete production:
Batches of material 10 5 15
Per unit of production:
Number of Machine operations 6 3 2
You are requested to PREPARE a statement for management showing the product
costs of eachproduct using the ABC approach.
ILLUSTRATION 2
MST Limited has collected the following data for its two activities. It calculates
activity cost rates based on cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hours 50,000 kilowatt hours Rs. 2,00,000
Quality Inspections Number of Inspections 10,000 Inspections Rs. 3,00,000

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 Module 4 – Activity Based Costing
The company makes three products M, S and T. For the year ended March 31,
2020, the following consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) COMPUTE the costs allocated to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
ILLUSTRATION 3
ABC Ltd. Manufactures two types of machinery equipment Y and Z and applies /
absorbs overheads on the basis of direct-labour hours. The budgeted overheads
and direct-labour hours for the month of December, 2020 are Rs. 12,42,500 and
20,000 hours respectively. The information about Company’s products is as
follows:
Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost Rs. 300 per unit Rs. 450 per unit
Direct labour cost
Y : 3 hours @ Rs. 150 per hour Rs. 450 Rs. 600
Z : 4 hours @ Rs. 150 per hour
ABC Ltd.’s overheads of Rs. 12,42,500 can be identified with three major activities:
Order Processing (Rs. 2,10,000), machine processing (Rs. 8,75,000), and product
inspection (Rs. 1,57,500). These activities are driven by number of orders processed,
machine hours worked, and inspection hours, respectively. The data relevant to these
activities is as follows:
Orders Machine hours Inspection hours
processed worked
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000
Required:
(i) Assuming use of direct-labour hours to absorb / apply overheads to
production, COMPUTE the unit manufacturing cost of the equipment Y and Z,
if the budgeted manufacturing volume is attained.
(ii) Assuming use of activity-based costing, COMPUTE the unit manufacturing
costs of the equipment Y and Z, if the budgeted manufacturing volume is
achieved.

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 Module 4 – Activity Based Costing
(iii) ABC Ltd.’s selling prices are based heavily on cost. By using direct-labour hours
as an application base, CALCULATE the amount of cost distortion (under-
costed or over-costed) for each equipment.
ILLUSTRATION 4
‘Humara - Apna’ bank offers three products, viz., deposits, Loans and Credit Cards.
The bank has selected 4 activities for a detailed budgeting exercise, following activity
based costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, so
that prices may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Estimation for the
Cost (Rs.) budget period
ATM Services:
(a) Machine Maintenance 4,00,000 All fixed, no change.
(b) Rents 2,00,000 Fully fixed, no change.
(c) Currency Replenishment Cost 1,00,000 Expected to double during
budget period.
7,00,000 (This activity is driven by no. of
ATM transactions)
Computer Processing 5,00,000 Half this amount is fixed and no
change is expected.
The variable portion is expected to
increase to three times the current
level.
(This activity is driven by the
number of computer transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are
made. In the budget period, 5
lakh statements are expected.
For every increase of one lakh
statement, one lakh rupees is the
budgeted increase.
(This activity is driven by the
number of statements)
Computer Inquiries 2,00,000 Estimated to increase by 80%
during the budget period.
(This activity is driven by
telephone minutes)
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 Module 4 – Activity Based Costing
The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit
Cards
No. of ATM Transactions 1,50,000 --- 50,000
No. of Computer Processing Transactions 15,00,000 2,00,000 3,00,000
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and
14,000 Credit Card Accounts.
Required:
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per account for each product using (i) and
(ii) above.
ILLUSTRATION 5
Woolmark Ltd. manufactures three types of products namely P, Q and R.
The data relating to a period are as under:
Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (Rs.) 90 80 120
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production
overheads on the basis of machine hours. The machine hour rate of overheads is Rs.
6 per hour. Direct labour hour rate is Rs. 20 per hour.
The company proposes to use activity based costing system and the activity analysis is
as under:
Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs……………………………………… 20%
Machine operation costs……………………………………. 30%
Inspection costs……………………………………………… 40%
Material procurement related costs……………………….. 10%
You are required CALCULATE the cost per unit of each product using activity based costing
principles.
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 Module 4 – Activity Based Costing
ILLUSTRATION 6
RST Limited specializes in the distribution of pharmaceutical products. It buys from
the pharmaceutical companies and resells to each of the three different markets.
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April, 2020 in respect of RST Limited hasbeen
reported:
General Drugstore Chemist
Supermarket Chains Shops
Chains
(Rs.) (Rs.) (Rs.)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold per delivery 82,500 27,500 4,950
Number of deliveries 330 825 2,750
In the past, RST Limited has used gross margin percentage to evaluate the
relative profitability of its distribution channels.
The company plans to use activity based costing for analysing the profitability of its
distribution channels.
The Activity analysis of RST Limited is as under:
Activity Area Cost Driver
Customer purchase order Purchase orders by customers
processing
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store perdelivery
Shelf-stocking at customer store Hours of shelf-stocking
The April, 2020 operating costs (other than cost of goods sold) of RST Limited are
Rs. 8,27,970. These operating costs are assigned to five activity areas. The cost in each
area and the quantity of the cost allocation basis used in that area for April, 2020 are as
follows:
Activity Area Total costs in Total Units of Cost
April, 2020 (Rs.) Allocation Base used
in April, 2020
Customer purchase order processing 2,20,000 5,500 orders
Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries
Cartons dispatched to store 2,09,000 2,09,000 cartons
Shelf-stocking at customer store 28,160 1,760 hours

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 Module 4 – Activity Based Costing
Other data for April, 2020 include the following:
General Drugstore Chemist
Supermarket Chains Shops
Chains
Total number of orders 385 990 4,125
Average number of line itemsper order 14 12 10
Total number of store deliveries 330 825 2,750
Average number of cartonsshipped 300 80 16
per store delivery
Average number of hours of shelf- 3 0.6 0.1
stocking per storedelivery
Required:
(i) COMPUTE for April, 2020 gross-margin percentage for each of its three
distribution channels and compute RST Limited’s operating income.
(ii) COMPUTE the April, 2020 rate per unit of the cost-allocation base for each of
the five activity areas.
(iii) COMPUTE the operating income of each distribution channel in April, 2020
using the activity-based costing information. Comment on the results. What
new insights are available with the activity-based cost information?
(iv) DESCRIBE four challenges one would face in assigning the total April, 2020
operating costs of Rs. 8,27,970 to five activity areas.
ILLUSTRATION 7
Family Store wants information about the profitability of individual product lines:
Soft drinks, Fresh produce and Packaged food. Family store provides the following
data for the year 2019-20 for each product line:
Soft drinks Fresh Packaged
produce food
Revenues Rs. 39,67,500 Rs. 1,05,03,000 Rs. 60,49,500
Cost of goods sold Rs. 30,00,000 Rs. 75,00,000 Rs. 45,00,000
Cost of bottles returned Rs. 60,000 Rs. 0 Rs. 0
Number of purchase orders placed 360 840 360
Number of deliveries 300 2,190 660
received
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000

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 Module 4 – Activity Based Costing
Family store also provides the following information for the year 2019-20:
Activity Description of activity Total Cost Cost-allocation
base
Bottles Returning of empty bottles Rs. 60,000 Direct tracing to
returns soft drink line
Ordering Placing of orders for Rs. 7,80,000 1,560 purchase
purchases orders
Delivery Physical delivery and receipt Rs. 12,60,000 3,150 deliveries
of goods
Shelf Stocking of goods on store Rs. 8,64,000 8,640 hours of
stocking shelves and on- going restocking shelf-stocking time
Customer Assistance provided to customers Rs. 15,36,000 15,36,000 items
Support including check-out sold
Required:
a. Family store currently allocates support cost (all cost other than cost of goods
sold) to product lines on the basis of cost of goods sold of each product line.
CALCULATE the operating income and operating income as a % of revenues for
each product line.
b. If Family Store allocates support costs (all costs other than cost of goods sold) to
product lines using and activity-based costing system, CALCULATE the operating
income and operating income as a % of revenues for each product line.
ILLUSTRATION 8
Alpha Limited has decided to analyse the profitability of its five new customers. It buys
bottled water at Rs. 90 per case and sells to retail customers at a list price of Rs. 108 per
case. The data pertaining to five customers are:
Customers
A B C D E
Cases sold 4,680 19,688 1,36,800 71,550 8,775
Listed Selling Price Rs. 108 Rs. 108 Rs. 108 Rs. 108 Rs. 108
Actual Selling Price Rs. 108 Rs. 106.20 Rs. 99 Rs. 104.40 Rs. 97.20
Number of Purchase 15 25 30 25 30
orders
Number of Customer 2 3 6 2 3
visits
Number of deliveries 10 30 60 40 20
Kilometers travelled 20 6 5 10 30
per delivery
Number of 0 0 0 0 1
expedited deliveries

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 Module 4 – Activity Based Costing
Its five activities and their cost drivers are:
Activity Cost Driver Rate
Order taking Rs. 750 per purchase order
Customer visits Rs. 600 per customer visit
Deliveries Rs. 5.75 per delivery Km travelled
Product handling Rs. 3.75 per case sold
Expedited deliveries Rs. 2,250 per expedited delivery
Required:
a) COMPUTE the customer-level operating income of each of five retail
customers now being examined (A, B, C, D and E). Comment on the results.
b) STATE what insights are gained by reporting both the list selling priceand the
actual selling price for each customer?
ILLUSTRATION 9
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures
three ranges of beauty soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT-
Diamond. The budgeted costs and production for the month of December, 2020 are
as follows:
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT-
Diamond
Production of 4,000 3,000 2,000
soaps (Units)
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential 60 ml Rs. 200 / 100 ml 55 ml Rs. 300 / 100 ml 65 ml Rs. 300 / 100
Oils ml
- Cocoa 20 g Rs. 200 / 100 g 20 g Rs. 200 / 100 g 20 g Rs. 200 / 100 g
Butter
- Filtered 30 ml Rs. 15 / 100 ml 30 ml Rs. 15 / 100 ml 30 ml Rs. 15 / 100 ml
Water
- Chemicals 10 g Rs. 30 / 100 g 12 g Rs. 50 / 100 g 15 g Rs. 60 / 100 g
- Direct 30 Rs. 10 / hour 40 Rs. 10 / hour 60 Rs. 10 / hour
Labour minutes minutes minutes
Bio-organic Ltd. followed an Absorption Costing System and absorbed its production
overheads, to its products using direct labour hour rate, which were budgeted at
Rs. 1,98,000.
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For
this, additional information regarding budgeted overheads and their cost drivers is
provided below:

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 Module 4 – Activity Based Costing
Particulars (Rs.) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operations per unit of production are 5, 5, and 6 for
BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg
and 1 kg respectively (ii) Mass of output produced is equivalent to the mass of input
materials taken together.)
You are requested to PREPARE a statement showing the product costs of each product
usingthe ABC approach.

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