Advanced Cost and Management AccountingTU Board 2081
XYZ manufacturing company produced three products, Alpha, Beta and Gama. The following information for the product is provided: Product Output unit Production runs in period Direct labour haour per…
10XYZ manufacturing company produced three products, Alpha, Beta and Gama. The following information for the product is provided:
| Product | Output unit | Production runs in period | Direct labour haour per unit (DLH) | No of order | Direct labour cost per hour (Rs.) | Material cost per unit (Rs.) |
|---|---|---|---|---|---|---|
| Alpha | 1,000 | 10 | 3 | 4 | 20 | 90 |
| Beta | 1,500 | 15 | 4 | 6 | 20 | 80 |
| Gama | 2,000 | 20 | 2 | 8 | 20 | 70 |
The overhead cost and cost drivers are as follows:
| Overhead | Cost Drivers | Amount (Rs.) |
|---|---|---|
| Supervision cost | DLH | 195,000 |
| Scheduling cost | Production runs | 135,000 |
| Set-up cost | Production runs | 90,000 |
| Material order cost | No of order | 27,000 |
Required: a. Overhead rate per labour hour. b. Total cost and cost per unit under Traditional and ABC Costing
Answer
a. Overhead rate per labour hour
Step 1: Identify the overhead cost and its cost driver The only overhead cost that uses Direct Labour Hours (DLH) as a cost driver is Supervision cost (Rs. 195,000).
Step 2: Calculate total DLH for all products Total DLH = (Alpha: 1,000 units × 3 DLH/unit) + (Beta: 1,500 units × 4 DLH/unit) + (Gama: 2,000 units × 2 DLH/unit) = 3,000 + 6,000 + 4,000 = 13,000 DLH
Step 3: Compute overhead rate per labour hour Overhead rate per DLH = Total Supervision cost / Total DLH = 195,000 / 13,000 = Rs. 15 per DLH
b. Total cost and cost per unit under Traditional and ABC Costing
1. Traditional Costing (Single Overhead Rate)
Step 1: Calculate total overhead cost Total overhead cost = Supervision cost + Scheduling cost + Set-up cost + Material order cost = 195,000 + 135,000 + 90,000 + 27,000 = Rs. 447,000
Step 2: Calculate total DLH (already computed as 13,000 DLH)
Step 3: Compute overhead rate per DLH Overhead rate per DLH = Total overhead cost / Total DLH = 447,000 / 13,000 = Rs. 34.38 per DLH
Step 4: Calculate total cost and cost per unit for each product
| Product | Direct Material Cost (Rs.) | Direct Labour Cost (Rs.) | Overhead Cost (Rs.) | Total Cost (Rs.) | Cost per Unit (Rs.) |
|---|---|---|---|---|---|
| Alpha | (1,000 × 90) = 90,000 | (1,000 × 3 × 20) = 60,000 | (3,000 × 34.38) = 103,140 | 253,140 | 253.14 |
| Beta | (1,500 × 80) = 120,000 | (1,500 × 4 × 20) = 120,000 | (6,000 × 34.38) = 206,280 | 446,280 | 297.52 |
| Gama | (2,000 × 70) = 140,000 | (2,000 × 2 × 20) = 80,000 | (4,000 × 34.38) = 137,520 | 357,520 | 178.76 |
2. Activity-Based Costing (ABC Costing)
Step 1: Allocate overhead costs based on cost drivers
| Overhead Cost | Cost Driver | Total Cost (Rs.) | Allocation Rate (per unit of driver) |
|---|---|---|---|
| Supervision cost | DLH | 195,000 | 195,000 / 13,000 = Rs. 15 per DLH |
| Scheduling cost | Production runs | 135,000 | 135,000 / (10+15+20) = Rs. 3,375 per run |
| Set-up cost | Production runs | 90,000 | 90,000 / (10+15+20) = Rs. 2,250 per run |
| Material order cost | No of order | 27,000 | 27,000 / (4+6+8) = Rs. 1,800 per order |
Step 2: Calculate overhead cost per product
| Product | Supervision Cost (DLH × 15) | Scheduling Cost (Runs × 3,375) | Set-up Cost (Runs × 2,250) | Material Order Cost (Orders × 1,800) | Total Overhead Cost (Rs.) |
|---|---|---|---|---|---|
| Alpha | (3,000 × 15) = 45,000 | (10 × 3,375) = 33,750 | (10 × 2,250) = 22,500 | (4 × 1,800) = 7,200 | 108,450 |
| Beta | (6,000 × 15) = 90,000 | (15 × 3,375) = 50,625 | (15 × 2,250) = 33,750 | (6 × 1,800) = 10,800 | 185,175 |
| Gama | (4,000 × 15) = 60,000 | (20 × 3,375) = 67,500 | (20 × 2,250) = 45,000 | (8 × 1,800) = 14,400 | 186,900 |
Step 3: Calculate total cost and cost per unit
| Product | Direct Material Cost (Rs.) | Direct Labour Cost (Rs.) | Overhead Cost (Rs.) | Total Cost (Rs.) | Cost per Unit (Rs.) |
|---|---|---|---|---|---|
| Alpha | 90,000 | 60,000 | 108,450 | 258,450 | 258.45 |
| Beta | 120,000 | 120,000 | 185,175 | 425,175 | 283.45 |
| Gama | 140,000 | 80,000 | 186,900 | 406,900 | 203.45 |
Comparison of Traditional and ABC Costing
Key Observations:
- Alpha is slightly overcosted in ABC due to higher material order and set-up costs.
- Beta is undercosted in Traditional Costing because it has higher production runs and material orders, which are better captured in ABC.
- Gama is significantly undercosted in Traditional Costing because it has lower DLH but higher production runs and material orders, leading to higher overhead allocation in ABC.
Discussion
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