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1. ABC Ltd. produces three components X, Y and Z.

the profit and Loss budget, for the year ending 31.03.10 are as follows: (Rs. In Lakhs) Particulars X Y Z TOTAL Sales 21.0 15.0 5.0 41.0 Materials 7.5 4.0 1.0 12.5 Lobour 3.0 3.0 0.5 6.5 Overheads are absorbed on the basis of labour hours. The following are the further data regarding cost volume and the cost drivers Overheads Rs. Set-up-cost 50,000 Machine repairs & Maintenance 7,70,000 Material handling and receiving costs 5,00,000 Packing 3,00,000 Production order cost 3,80,000 20,00,000 Particulars Selling price per unit Labour Cost per hour Labour hours per unit Machine hours per unit Number of set-ups Number of receipts Number of deliveries Number of production orders X Rs.700 100 1 1 15 10 10 10 Product Y Rs.750 75 2 1 10 15 8 9

Z Rs.500 50 1 2 25 225 22 19

All costs are avoidable. From the above information you are required to: compute the product costs using a traditional volume related costing system based on the assumptions that: All overheads are recovered on the basis of direct labour hrs. (i.e. the Cos product costing system). Prepare statement of profit under both the methods and give your comments. 2. RAM Company manufactures and sells two types of wooden deck chairs, Deluxe and Tourist. Annual sales in units, Direct labour-hours per unit and Total labour-hours per year are provided below: Hours Deluxe deck chair (2,000 units x 5 Direct Labour Hours per unit) 10,000 Tourist deck chair (10,000 units x 4 Direct Labour Hours per unit) 40,000 Total Direct labour-hours 50,000 Costs for materials and labour for one unit of each product are: Deluxe Tourist Direct Materials (Rs.) 25 17 Direct Labour (at Rs. 12 per DLH) 60 48 Manufacturing overhead costs total Rs.8,00,000 each year. The breakdown of these costs among the companys six activity cost pools is given below. The activity measures are shown in brackets.

Estimated Overheads Expected Activity Levels (in Rs.) Total Deluxe Tourist Labour related (Direct labour-hours) 80,000 50,000 10,000 40,000 Machine setups (Number of setups) 1,50,000 5,000 3,000 2,000 Parts administration (Number of Parts) 1,60,000 80 50 30 Production orders (Number of orders) 70,000 400 100 300 Material receipts (Number of receipts) 90,000 750 150 600 General Factory (Machine Hours) 2,50,000 40,000 12,000 28,000 REQUIRED: Classify each of Rams activities as a Unit level, Batch level, product level, or Facility level activity. Assume that the companys applies overhead cost to products on the basis of direct labour hours. i. Compute the predetermined overhead rate that would be used. ii. Determine the unit product cost of each product, using the predetermined overhead rate computed above. Assume that the company uses Activity Based Costing to compute overhead rates. i. Compute the activity rate (i.e. predetermined overhead rate) for each of the six centers listed above. ii. Using the above ABC rates, find the amount of OH cost that would be assigned to a unit of each product. iii. Determine the unit product cost of each product and compare this cost to the cost computed using the rate based on direct labour hours. 3. A company produces four products-P,Q, R and S. the data relating to production activity are as under: Product P Q R S Quantity of Material Direct labour production cost/unit hours/unit 1,000 10 10,000 10 1,200 32 14,000 34 Machine hours/unit 1 1 4 3 0.5 0.5 2 3 Direct labour cost/unit 6 6 4 18

PRODUCTION OVERHEADS ARE UNDER (i) Overheads applicable to machine oriented activity (ii) Overheads relating to ordering materials (iii) Set of costs (iv) Administration overheads for spare parts (v)Material handling costs THE FOLLOWING FITIRE OMFPR,ATOPM JAVE BEEN COMPILED No. of materials No. of times No. pf set ups orders materials handled 3 3 6 18 12 30 5 3 9 24 12 36

Rs.1,49,700 Rs.7,680 Rs. 17,400 Rs. 34,380 Rs. 30,294

Product P Q R S

No. of spares parts 6 15 3 12

REQUIRED: Select a suitable cost driver for each item of overhead expense and calculate the cost per unit of cost driver. Using the concept of activity based costing, compute the factory cost per unit of each product.

4. A company manufactures several products of varying levels of designs and models. It uses a single overhead recovery rate based on direct labour hours. The overheads incurred by the company in the first half of the year are as under: Rs. Machine operation expenses 10,12,500 Machine maintenance expenses 1,87,500 Salaries of technical staff 6,37,500 Wages and salaries of stores staff 2,62,500 During this period, the company introduced activity based costing system and the following significant activities were identified: receiving materials and components. Set up of machines for production runs quality inspection, it is also determined that: The machine operation and machine maintenance expenses should be apportioned between stores and production activity in 20:80 ratio. The technical staff salaries should be apportioned between machine maintenance, set up and quality inspection in 30:40:30 ratio. THE CONSUMPTION OF ACTIVITIES DURING THE PERIOD UNDER REVIEW ARE AS UNDER: Direct labour hours worked Direct wage rate Rs. 6 per hour Production set-ups Material and component consignments received from suppliers Number of quality inspections carried out 40,000 2,040 1,960 1,280

The data relating to two products manufactured by the company during the period are as under: Products P Q Direct material costs Rs. 6,000 4,000 Direct labour hours 960 100 Direct material consignments received 48 52 Production runs 36 24 Number of quality inspections done 30 10 Quantity produced (Units) 15,000 5,000 A potential customer has approached the company for the supply of 24,000 units of a component K to be delivered in lots of 3,000 units per quarter. The job will involve an initial design cost of Rs. 60,000 and the manufacture will involve the following per quarter: Direct material costs Rs. 12,000 Direct labour hours 300 Production runs 6 Inspections 24 Number of consignments of direct Materials to be received 20 The company desires a mark up to of 25% on cost. Required: (i) Calculate the cost of products P and Q based on the existing system of single overhead recovery rate. (ii) Determine the cost of products P and Q using activity based costing system, (iii) compute the sales value per quarter of component K using activity based costing system. 5. During the last 20 years, KL Ltds manufacturing operation has become increasingly automated with Computercontrolled robots replacing operators. KL currently manufactures over 100 products of varying levels of design complexity. A single plant wise overhead absorption rate, based on direct labour hours, is used to absorb overhead costs. In the Quarter ended March KLs Manufacturing overhead costs were:

Equipment operation expenses Equipment maintenance expense Wages paid to technicians Wages paid to Store men Wages paid to dispatch staff

(Rs. '000') 125 25 85 35 40

310 During the quarter, the company reviewed the Cost Accounting System and concluded that absorbing overheads costs to individual products on a labour hour absorption basis is meaningless. Overhead costs should be attributed to products using and Activity Based Costing (ABC) System and the following was identified as the most significant activities: (i) Receiving component consignment from suppliers. (ii) Setting equipment for production runs. (iii) Quality inspections. (iv) Dispatching goods as per customers orders. It was further observed that in the short-term KLs overheads are 40% fixed and 60% variable. Approximately, half the variable overheads vary in relating to direct labour hours worked and half vary in relation to the number of quality inspections. Equipment operation and maintenance expenses are apportioned as: Component stores 15%, manufacturing 70% and goods dispatch 15%. Technicians wages are apportioned as: Equipment maintenance 30% set up equipment for production runs 40% and quality inspections 30%. During the quarter: (i) a total of 2000 direct labour hours were worked (paid at Rs.12 per hr.) (ii) 980 components consignments were received from suppliers. (iii) 1020 production runs were set up. (iv) 640 quality inspections were carried out. (v) 420 orders were dispatched to customers. KLs production during the quarter included components R,S and T. The following information is available: Component Component Component Particular R S T Direct labour Hours worked 25 480 50 Direct Material Rs. 1,200 Rs. 2,900 Rs. 1,800 Component Consignments Recd. 42 24 28 Production runs 16 18 12 Quality Inspection 10 8 18 Orders (goods) dispatched 22 85 46 Quantity produced 560 12,800 2,400 REQUIRED: (1) Calculate the unit cost of R,S, and T components, using KLs existing cost accounting system. (2) Explain how an ABC system would be developed using the information given. Calculate the unit cost of components R, S and T using ABC system.