Question

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.

Answer 1

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