The budgeted overheads and cost driver volumes of XYZ Ltd. are as follows:
| Cost pool | Budgeted overhead (₹) | Cost driver | Budgeted Volume |
|-------------------|-----------------------|-------------------|-----------------|
| Material procured | 56,000 | No. of orders | 100 |
| Material handling | 24,000 | No. of movements | 60 |
| Machine Setups | 40,000 | No. of Setups | 50 |
| Maintenance | 60,000 | Maintenance hours | 30 |
| Quality control | 20,000 | No. of Inspections| 40 |
The company has produced a batch of 200 components of product 'X'. The material cost was ₹50,000 and labour cost of ₹80,000. The usage activities of the said batch are as follows:
a) Material orders -> 10
b) Maintenance hours -> 300
c) Material movements -> 12
d) Inspections -> 16
e) Machine Setups -> 14
Calculate cost driver rates and ascertain the cost of the batch of component of product 'X' using Activity Based costing.
Answer (1)
To calculate the cost driver rates and ascertain the cost of the batch of component of product 'X' using Activity Based Costing (ABC), we need to follow these steps:
Calculate Cost Driver Rates :
The cost driver rate is calculated by dividing the budgeted overhead cost by the budgeted volume of the cost driver.
a) Material Procured Cost Driver Rate : Rate = Budgeted Volume Budgeted Overhead = 100 ₹56,000 = ₹560 per order
b) Material Handling Cost Driver Rate : Rate = 60 ₹24,000 = ₹400 per movement
c) Machine Setups Cost Driver Rate : Rate = 50 ₹40,000 = ₹800 per setup
d) Maintenance Cost Driver Rate : Rate = 30 ₹60,000 = ₹2,000 per hour
e) Quality Control Cost Driver Rate : Rate = 40 ₹20,000 = ₹500 per inspection
Calculate the Total Overhead Cost for the Batch :
Using the usage activities for the batch, calculate the overhead cost for each activity by multiplying the usage by the cost driver rate, then sum these costs.
a) Material Orders Cost : Cost = 10 × ₹560 = ₹5,600
b) Maintenance Hours Cost : Cost = 300 × ₹2,000 = ₹600,000
c) Material Movements Cost : Cost = 12 × ₹400 = ₹4,800
d) Inspections Cost : Cost = 16 × ₹500 = ₹8,000
e) Machine Setups Cost : Cost = 14 × ₹800 = ₹11,200
Sum Up the Total Overhead Cost :
Total Overhead Cost = ₹5,600 + ₹600,000 + ₹4,800 + ₹8,000 + ₹11,200 = ₹629,600
Calculate the Total Cost of the Batch :
To determine the total cost of the batch, add the material and labor costs to the total overhead costs.
Total Batch Cost = Material Cost + Labor Cost + Total Overhead Cost
Total Batch Cost = ₹50,000 + ₹80,000 + ₹629,600 = ₹759,600
Therefore, the total cost of producing the batch of 200 components of product 'X' using Activity Based Costing is ₹759,600.
