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

Answer:

(i) Total Cost of Each unit as per existing method:-

	Soul	Heal
Direct Material	30,000	50,000
Direct Labor	60,000	80,000
Overheads	4,286 [(10000000*60/140)/1000]	5,714 [(10000000*80/140)/1000]
Total Cost per Unit	Rs. 94,286	Rs. 135,714

(ii) Total Cost of Each unit as per Activity Based Costing method:-

	Soul	Heal
Direct Material................[A]	30,000	50,000
Direct Labor....................[B]	60,000	80,000
Overheads:
- Designing	1,350,000 [1800000*30/40]	450,000 [1800000*10/40]
- Set Ups	1,600,000 [2400000*68/102]	800,000 [2400000*34/102]
- Machining	2,000,000 [3500000*44000/77000]	1,500,000 [3500000*33000/77000]
- Quality Control	1,300,000 [2300000*26/46]	1,000,000 [2300000*20/46]
Total Overhead Costs	6,250,000	3,750,000
Overhead Costs per Unit..[C]	6,250 (6250000/1000)	3,750 (3750000/1000)
Total Cost per Unit [A+B+C]	Rs. 96,250	Rs. 133,750