Xtyle Ltd. is a leading manufacturer in the textile industry, renowned for its commitment to quality and innovation. With decades of experience, the…

CA Intermediate · Cost and Management Accounting · MTP · January 2025
Xtyle Ltd. is a leading manufacturer in the textile industry, renowned for its commitment to quality and innovation. With decades of experience, the company specializes in producing a diverse range of textile products, including high-quality towels, designed to meet the varying needs of its customers. The company offers mainly three types of towel, viz. Hand towels, Kitchen towels and Gym towels, catering to both everyday use and specialized applications. Below are the key production data for a recent period: Particulars Hand towels Kitchen towels Gym towels Production (units) 9,000 15,000 60,000 Machine hours per unit 10 18 14 Direct Labour hours per unit 4 12 8 Direct Material per unit (₹) 450 400 600 Currently, the company utilizes a traditional costing method, which assigns all production overhead costs based on the number of machine hours used. The overhead cost is calculated at a rate of 30 per machine hour. Additionally, the direct labor cost is charged at 100 per hour. Now, the company plans to implement an Activity-Based Costing (ABC) system to enhance cost accuracy and provide a clearer understanding of the costs associated with each product. The activity analysis is provided as under: Particulars Hand towels Kitchen towels Gym towels Batch size (units) 450 1,500 3,000 Number of purchase orders per batch 3 10 8 Store delivery 45 80 125 Number of inspections per batch 5 4 3 Further, the total production overheads can be divided into several key categories. Machine setup costs account for 20% of the total, while inspection costs make up 35%. Material procurement-related costs represent 10%, and store delivery costs also constitute 10%. Finally, machine operation costs contribute 25% to the overall overheads. This breakdown provides insight into how resources are allocated across various activities within the production process. You are required to CALCULATE the cost per unit of each product using (i) traditional method. (ii) activity based costing principles.

Suggested Answer and Working Notes:

(i) Statement Showing “Cost per unit - Traditional Method" Particulars of Costs Hand towels (₹) Kitchen towels (₹) Gym towels (₹) Direct Materials 450 400 600 Direct Labour [(4, 12, 8 hours) × ₹ 100] 400 1,200 800 Production Overheads [(10, 18, 14 hours) × ₹ 30] 300 540 420 Cost per unit 1,150 2,140 1,820 (ii) Statement Showing “Cost per unit - Activity Based Costing" Products Hand towels Kitchen towels Gym towels Production (units) 9,000 15,000 60,000 Direct Materials 40,50,000 (9,000 units x 450) 60,00,000 (15,000 units x 400) 3,60,00,000 (60,000 units x 600) Direct Labour (refer Part (i) above) 36,00,000 (9,000 units x 400) 1,80,00,000 (15,000 units x 1,200) 4,80,00,000 (60,000 units x 800) Setup Costs @1,44,000 per setup 28,80,000 (20 setups x 1,44,000) 14,40,000 (10 setups x 1,44,000) 28,80,000 (20 setups x 1,44,000) Inspection Costs @63,000 per inspection 63,00,000 (100 inspections x 63,000) 25,20,000 (40 inspections x 63,000) 37,80,000 (60 inspections x 63,000) Purchase Related Costs @11,250 per purchase order 6,75,000 (60 purchase orders x 11,250) 11,25,000 (100 purchase orders x 11,250) 18,00,000 (160 purchase orders x 11,250) Store delivery costs @14,400 per store delivery 6,48,000 (45 store delivery x 14,400) 11,52,000 (80 store delivery x 14,400) 18,00,000 (125 store delivery x 14,400) Machine Related Costs @7.5 per hour 6,75,000 (90,000 hours x 7.5) 20,25,000 (2,70,000 hours x 7.5) 63,00,000 (8,40,000 hours x 7.5) Total Costs 1,88,28,000 3,22,62,000 10,05,60,000 Cost per unit (Total Cost no. of Units) 2,092 2,151 1,676 Working Notes: A. Number of Batches, Purchase Orders, Inspections and Store Deliveries- Particulars Hand towels Kitchen towels Gym towels Total A. Production (units) 9,000 15,000 60,000 B. Batch Size (units) 450 1,500 3,000 C. Number of Batches (A÷B) 20 10 20 50 D. Number of Purchase Order per batch 3 10 8 E. Total Purchase Orders [C × D] 60 100 160 320 F. Number of Inspections per batch 5 4 3 G. Total Inspections [C × F] 100 40 60 200 H. Total Store Deliveries 45 80 125 250 B. Total Machine Hours- Particulars Hand towels Kitchen towels Gym towels A. Machine Hours per unit 10 18 14 B. Production (units) 9,000 15,000 60,000 C. Total Machine Hours [A × B] 90,000 2,70,000 8,40,000 Total Machine Hours = 12,00,000 Total Production Overheads- = 12,00,000 hrs. × ₹ 30 = 3,60,00,000 C. Cost Driver Rates- Cost Pool % Overheads (₹) Cost Driver Basis Cost Driver (Units) Cost Driver Rate (₹) Setup 20% 72,00,000 Number of batches 50 1,44,000 per Setup Inspection 35% 1,26,00,000 Number of inspections 200 63,000 per Inspection Purchases 10% 36,00,000 Number of purchase order 320 11,250 per Purchase order Store delivery 10% 36,00,000 Number of store deliveries 250 14,400 per store delivery Machine Operation 25% 90,00,000 Machine Hours 12,00,000 7.5 per Machine Hour

Topics: Activity Based Costing

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