Chicago Manufacturing Co. (CMC) manufactures several product of varying levels of designs and models. It uses a single overhead recovery rate based…

CA Intermediate · Cost and Management Accounting · MTP · September 2025
Chicago Manufacturing Co. (CMC) manufactures several product of varying levels of designs and models. It uses a single overhead recovery rate based on direct labour hours. The overheads incurred by the CMC in the half of the year are as under: Particulars ₹ 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, CMC introduced activity based costing system and the following significant activities were identified: receiving materials and componentsset up of machines for production runsquality inspection It is 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 40,000Direct wage rate 6 per hourProduction set-ups 2,040Material and component consignments from received from suppliers 1,960Number of quality inspections carried out 1,280 The data relating to two product manufactured by the CMC during the period are as under: Product P Product Q Direct material costs (₹) 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 CMC 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 60,000 and the manufacture will involve the following per quarter: Direct material costs 12,000 Direct labour hours 300 Production runs 6 Inspections 24 Number of consignments of Direct materials to be received 20 CMC desires a mark up of 25% on cost. Required: (i) CALCULATE the cost of product P and Q based on the existing system of single overhead recovery rate. (ii) DETERMINE the cost of product P and Q using activity based costing system. (iii) COMPUTE the sales value per quarter of component K using activity based costing system.

Suggested Answer and Working Notes:

Working Notes 1. Overhead Rate per Labour Hour = Total Overhead Incurred by the Company in First Half Year / Total Direct Labour Hours Worked = 21,00,000 / 40,000 hours = 52.50 per labour hour 2. Statement Showing Apportionment of ‘Technical Staff Salaries’ Over 'Machine Maintenance', 'Setup' and 'Quality Inspection' in the Ratio 30:40:30 Total Salaries (₹) Machine Maintenance (₹) Setup (₹) Quality Inspection (₹) Technical Staff Salaries 6,37,500 1,91,250 2,55,000 1,91,250 3. Statement Showing Apportionment of 'Machine Operation' and 'Machine Maintenance' Between 'Stores' and 'Production Activity (Setup)' Total Expenses (₹) Stores / Receiving (₹) Setup (₹) Machine Operation (20:80) 10,12,500 2,02,500 8,10,000 Machine Maintenance (20:80) [₹ 1,91,250 +1,87,500] (Refer to W.N. 2) 3,78,750 75,750 3,03,000 Wages and Salaries of Stores Staff 2,62,500 2,62,500 --- Component of Setup Cost (Refer to W.N. 2) 2,55,000 --- 2,55,000 Total 19,08,750 5,40,750 13,68,000 4. Rate per 'Activity Cost Driver' Stores / Receiving (₹) Setup (₹) Quality Inspection (₹) Total Overheads (₹) ...(A) 5,40,750 13,68,000 1,91,250 Units of Activities Carried out ...(B) 1,960 2,040 1,280 Rate per Activity Cost Driver (₹) ...{(A) / (B)} 275.89 670.59 149.41 (i) Statement Showing “Computation of Cost of Product P and Q" (Based on the Existing System of 'Single Overhead Recovery Rate') Product P Product Q Units 15,000 5,000 Direct Materials Cost (₹) 6,000 4,000 Direct Labour Cost (₹) (960 hours x 6) / (100 hours x 6) 5,760 600 Overheads (₹) (Refer to W.N. 1) (960 hours x 52.50) / (100 hours x 52.50) 50,400 5,250 Total Cost of Products (₹) 62,160 9,850 Cost per unit (₹) (₹ 62,160 / 15,000 units) / (₹ 9,850 / 5,000 units) 4.144 1.97 (ii) Statement Showing Computation of Cost of Products P and Q (Using 'Activity Based Costing System') Product P Product Q Units 15,000 5,000 Direct Materials Cost (₹) 6,000 4,000 Direct Labour Cost (₹) 5,760 600 Receiving Cost (Refer to W.N. 4) (48 x 275.89) / (52 x 275.89) 13,243 14,346 Setup Cost (Refer to W.N. 4) (36 x 670.59) / (24 x 670.59) 24,141 16,094 Inspection Cost (Refer to W.N. 4) (30 x 149.41) / (10 x 149.41) 4,482 1,494 Total Cost of Products (₹) 53,626 36,534 Cost per unit (₹) (₹ 53,626 / 15,000 units) / (₹ 36,534 / 5,000 units) 3.58 7.31 (iii) Computation of Sales Value per Quarter 'Component K' (Using 'Activity Based Costing System') Particulars ₹ 3,000 units of 'Component K' to be delivered per quarter Initial Design Cost per quarter (₹ 60,000 / 8 quarters) 7,500 Direct Material Cost 12,000 Direct Labour Cost (300 hours x 6) 1,800 Receiving Cost (20 No. of Consignment x 275.89) 5,518 Setup Cost (6 Production Runs x 670.59) 4,024 Inspection Cost (24 Inspections x 149.41) 3,586 Total Cost 34,428 Add: Mark up (25% of cost) 8,607 Sales Value 43,035 Selling Price per unit ‘K' (₹ 43,035 / 3,000 units) 14.35

Topics: Activity Based Costing

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