SOFTHUG is a global brand created by Green-lush Ltd. The company manufactures three range of beauty soaps i.e. SOFTHUG- Gold, SOFTHUG- Pearl, and…

CA Intermediate · Cost and Management Accounting · RTP · September 2024
SOFTHUG is a global brand created by Green-lush Ltd. The company manufactures three range of beauty soaps i.e. SOFTHUG- Gold, SOFTHUG- Pearl, and SOFTHUG- Diamond. The budgeted costs and production for the month of May, 2024 are as follows: SOFTHUG- Gold SOFTHUG- Pearl SOFTHUG- Diamond Production of soaps (Units) 4,000 3,000 2,000 Resources per Unit: Essential Oils 60 ml @200/100 ml 55 ml @300/100 ml 65 ml @300/100 ml Cocoa Butter 20 g @200/100 g 20 g @200/100 g 20 g @200/100 g Filtered Water 30 ml @15/100 ml 30 ml @15/100 ml 30 ml @15/100 ml Chemicals 10 g @30/100 g 12 g @50/100 g 15 g @60/100 g Direct Labour 30 minutes @10/hour 40 minutes @10/hour 60 minutes @10/hour Green-lush Ltd. followed an Absorption Costing System and absorbed its production overheads, to its products using direct labour hour rate, which were budgeted at 1,98,000. Now, Green-lush Ltd. is considering adopting an Activity Based Costing system. For this, additional information regarding budgeted overheads and their cost drivers is provided below: Particulars (*) Cost drivers Forklifting cost 58,000 Weight of material lifted Supervising cost 60,000 Direct labour hours Utility cost 80,000 Number of Machine operations The number of machine operators per unit of production are 5, 5, and 6 for SOFTHUG- Gold, SOFTHUG- Pearl, and SOFTHUG- Diamond respectively. (Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii) Mass of output produced is equivalent to the mass of input materials taken together.) You are required to: (i) PREPARE a statement showing the unit costs and total costs of each product using the absorption costing method. (ii) PREPARE a statement showing the product costs of each product using the ABC approach. (iii) STATE what are the reasons for the different product costs under the two approaches?

Suggested Answer and Working Notes:

10. (i) Traditional Absorption Costing Effective wage rate per machine hour: Production bonus (10% of Basic and DA): Gold: 2,450.00, Pearl: 1,700.00 Leave wages (10% of Basic and DA): Gold: 2,450.00, Pearl: 1,700.00 Total: Gold: 29,400.00, Pearl: 20,400.00 Effective wage rate per machine hour: Gold: 196.00, Pearl: 136.00 SOFTHUG- Gold SOFTHUG- Pearl SOFTHUG- Diamond Total (a) Production of soaps (Units) 4,000 3,000 2,000 9,000 (b) Direct labour (minutes) 30 40 60 - (c) Direct labour hours ((a) × (b))/60 minutes) 2,000 2,000 2,000 6,000 Overhead rate per direct labour hour: = Budgeted overheads ÷ Budgeted labour hours = 1,98,000 ÷ 6,000 hours = 33 per direct labour hour Unit Costs: SOFTHUG- Gold (₹) SOFTHUG- Pearl (₹) SOFTHUG- Diamond (₹) Direct Costs: Direct Labour 5.00 (10×30)/60 6.67 (10×40)/60 10.00 (10×60)/60 Direct Material (Refer working note 1) 167.50 215.50 248.50 Production Overhead: SOFTHUG- Gold SOFTHUG- Pearl SOFTHUG- Diamond Production Overhead: 16.50 (33×30)/60 22.00 (33×40)/60 33.00 (33×60)/60 Total unit costs 189.00 244.17 291.50 Number of units 4,000 3,000 2,000 Total costs 7,56,000 7,32,510 5,83,000 Working note -1: Calculation of Direct material cost SOFTHUG- Gold (₹) SOFTHUG- Pearl (₹) SOFTHUG- Diamond (₹) Essential oils 120.00 (200×60)/100 165.00 (300×55)/100 195.00 (300×65)/100 Cocoa Butter 40.00 (200×20)/100 40.00 (200×20)/100 40.00 (200×20)/100 Filtered water 4.50 (15×30)/100 4.50 (15×30)/100 4.50 (15×30)/100 Chemicals 3.00 (30×10)/100 6.00 (50×12)/100 9.00 (60×15)/100 Total costs 167.50 215.50 248.50 (ii) Activity Based Costing SOFTHUG- Gold SOFTHUG- Pearl SOFTHUG- Diamond Total Quantity (units) 4,000 3,000 2,000 Weight per unit (grams) 108 {(60 × 0.8) + 20 + 30 + 10} 106 {(55 × 0.8) + 20 + 30 + 12} 117 {(65 × 0.8) + 20 + 30 + 15} Total weight (grams) SOFTHUG- Gold 4,32,000 SOFTHUG- Pearl 3,18,000 SOFTHUG- Diamond 2,34,000 Total 9,84,000 Direct labour (minutes) SOFTHUG- Gold 30 SOFTHUG- Pearl 40 SOFTHUG- Diamond 60 Direct labour hours SOFTHUG- Gold 2,000 (4,000×30)/60 SOFTHUG- Pearl 2,000 (3,000×40)/60 SOFTHUG- Diamond 2,000 (2,000×60)/60 Total 6,000 Machine operations per unit SOFTHUG- Gold 5 SOFTHUG- Pearl 5 SOFTHUG- Diamond 6 Total operations SOFTHUG- Gold 20,000 SOFTHUG- Pearl 15,000 SOFTHUG- Diamond 12,000 Total 47,000 Forklifting rate per gram = 58,000 ÷ 9,84,000 grams = 0.06 per gram Supervising rate per direct labour hour = 60,000 ÷ 6,000 hours = 10 per labour hour Utilities rate per machine operations = 80,000 ÷ 47,000 machine operations = 1.70 per machine operations Unit Costs under ABC: SOFTHUG- Gold (₹) SOFTHUG- Pearl (₹) SOFTHUG- Diamond (₹) Direct Costs: Direct Labour 5.00 6.67 10.00 Direct material 167.50 215.50 248.50 Production Overheads: Forklifting cost 6.48 (0.06 × 108) 6.36 (0.06 × 106) 7.02 (0.06 × 117) Supervising cost 5.00 (10×30)/60 6.67 (10×40)/60 10.00 (10×60)/60 Utilities 8.50 (1.70 × 5) 8.50 (1.70 × 5) 10.20 (1.70 × 6) Total unit costs 192.48 243.70 285.72 Number of units 4,000 3,000 2,000 Total costs 7,69,920 7,31,100 5,71,440 (iii) Comments: The difference in the total costs under the two systems is due to the differences in the overheads borne by each of the products. The Activity Based Costs appear to be more precise.

Topics: Activity Based Costing

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