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Strums Ltd manufactures 2 types of guitars to the extent of 1000 units of each per...

Strums Ltd manufactures 2 types of guitars to the extent of 1000 units of each per month. These require Direct material and Direct labour as under:

Soul Heal
Direct material (Rs.-total) 30,000 50,000
Direct Labour (Rs.-total)   60,000

80,000

Overheads for a month amount to Rs. 1 crore which are usually allocated on the basis of direct labour cost consumed by each product. The manager feels that the current cost structure does not reflect the true cost absorbed by the products. He has collected further activity-wise information regarding the overheads which is tabulated as under:

Activity head Amount Activity driver Drivers allocated to Soul Drivers allocated to Heal
Designing Rs. 18,00,000 No. of tests 30 10
Setups Rs. 24,00,000 No. of setups 68 34
Machining Rs. 35,00,000 No. of machine hours 44,000 33,000
Quality control Rs. 23,00,000 No. of inspections 26 20

Find out the total cost of each unit of Soul and Heal as per the existing method of costing as well as per Activity Based Costing.

Solutions

Expert Solution

Existing Method of Costing:

Particulars Soul Heal Total
1. Direct Material 30,000 50,000 80,000
2. Direct Labor 60,000 80,000 1,40,000
3. Overheads (6:8) 42,85,714 57,14,286 1,00,00,000
4. Total Cost (1+2+3) 43,75,714 58,44,286 1,02,20,000
5. Number of Units 1,000 1,000
6. Cost per unit (Cost/Units) 4,375.71 5,844.29

Activity Based Costing:

Particulars Soul Heal Total
1. Direct Material 30,000 50,000 80,000
2. Direct Labor 60,000 80,000 1,40,000
3. Designing Costs 13,50,000 4,50,000 18,00,000
4. Setup Costs 16,00,000 8,00,000 24,00,000
5. Machining Costs 20,00,000 15,00,000 35,00,000
6. Quality Control Costs 13,00,000 10,00,000 23,00,000
7. Total Overheads 62,50,000 37,50,000 1,00,00,000
8. Total Costs 63,40,000 38,80,000 1,02,20,000
9. Number of Units 1,000 1,000
10. Cost per unit 6,340 3,880

Workings for Allocation of Overheads under ABC System:

Particulars Soul Heal Total
1. Designing 18,00,000
2. No. of Tests 30 10 40
3. Proportion 30/40 10/40
4. Allocation (1*3) 13,50,000 4,50,000 18,00,000
5. Setups 24,00,000
6. No. of Setups 68 34 102
7. Proportion 68/102 34/102
8. Allocation (5*7) 16,00,000 8,00,000 24,00,000
9. Machining 35,00,000
10. No. of Machine 44,000 33,000 77,000
11. Proportion 44,000/77,000 33,000/77,000
12. Allocation (9*11) 20,00,000 15,00,000 35,00,000
13. Quality Control 23,00,000
14. No. of Inspections 26 20 46
15. Proportion 26/46 20/46
16. Allocation (13*15) 13,00,000 10,00,000 23,00,000

ekkarill92 answered 2 years ago
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