Icecold a FMCG Company manufactures and sells three flavors of ice cream: Dark chocolate, Chocolate, and Butterscotch. The batch size for the ice…

CA Intermediate · Cost and Management Accounting · MTP · September 2024
Icecold a FMCG Company manufactures and sells three flavors of ice cream: Dark chocolate, Chocolate, and Butterscotch. The batch size for the ice cream is limited to 1,000 ice cream based on the size of the fridge and ice cream molds owned by the company. Based on budgetary projections, the information listed below is available: Dark chocolate Chocolate Butterscotch Projected sales in units 500,000 800,000 600,000 PER UNIT data: Selling price 80 75 60 Direct materials 20 15 14 Direct labor 4 2 2 Hours per 1000-unit batch: Direct labor hours 20 10 10 Fridge hours 1 1 1 Packaging hours 0.5 0.5 0.5 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Activity levels Direct labor 2,400 hours Fridge 2,10,00,000 1,900 fridge hours Packaging 1,50,00,000 950 packaging hours 3,60,00,000 Required: a. With the help of ABC system, for the Chocolate ice cream: Compute the activity-cost-driver rateCompute the estimated overhead costs per thousand ice cream.Compute the estimated operating profit per thousand ice cream. b. With the help of traditional system (with direct labor hours as the overhead allocation base), for the Chocolate ice cream, compute the estimated operating profit per thousand ice cream.

Suggested Answer and Working Notes:

A. With the help of ABC system, for the Chocolate ice cream: 1. Estimation of cost-driver rate Activity Overhead cost (₹) Cost driver Cost driver rate (₹) Packaging 1,50,00,000 950 Packaging hours 15,789.47 Fridge 2,10,00,000 1,900 Fridge hours 11,052.63 2. Overhead cost for a 1,000 ice cream batch Activity Overhead for a 1,000 ice cream batch Amount (₹) Packaging 1 x 11,052.63 11,052.63 Fridge 0.5 x 15,789.47 7,894.74 Total 18,947.37 3. Operating profit for chocolate ice cream Particulars Amount (₹) Revenue (1,000 x 75) 75,000.00 Less: Direct Material (1,000 x 15) 15,000.00 Less: Direct Labour (10,000 x 2) 20,000.00 Less: Overhead 18,947.37 Operating Profit 21,052.63 b. With the help of traditional system (with direct labor hours as the overhead allocation base), for the Chocolate ice cream, compute the estimated operating profit per thousand ice cream. Overhead per direct hour = Total Overhead / Total Direct Labour Hours = 3,60,00,000 / 24,000 hours = 1,500 per direct labour hour Since it takes 10 direct labour hour per 1,000 Chocolate ice cream, the overhead is 15,000 Particulars Amount (₹) Revenue (1,000 x 75) 75,000.00 Less: Direct Material (1000 x 15) 15,000.00 Less: Direct Labour (10,000 x 2) 20,000.00 Less: Overhead 15,000 Operating Profit 25,000

Topics: Activity Based Costing

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