VTR Tech Ltd is a precision engineering company that has experienced rapid automation in its production processes. The company now manufactures over…

CA Intermediate · Cost and Management Accounting · MTP · January 2026
VTR Tech Ltd is a precision engineering company that has experienced rapid automation in its production processes. The company now manufactures over 80 specialised components using CNC machines and automated systems. Despite this shift, VTR still allocates manufacturing overheads using a single plant-wide overhead absorption rate based on machine hours. In the quarter ending June, VTR's manufacturing overhead costs were as follows: Cost Item ₹ ('000) Machine Operating Expenses 140 Maintenance Costs 30 Wages of Machine Supervisors 90 Stores Handling Staff Wages 28 Packaging & Despatch Department Wages 42 During the quarter, management initiated a review of the costing system and concluded that using machine hours to absorb all overheads is no longer meaningful. The company decided to implement an Activity-Based Costing (ABC) approach and identified the following key activities: Receiving raw materials and componentsSetting up machines for productionQuality assurance checksPackaging and despatching finished goods The following data was also recorded during the quarter: Total machine hours used: 2,500 (charged at 18 per hour)1,100 material consignments were received from suppliers950 machine setups were carried out700 quality inspections were conducted480 customer orders were packaged and despatched Allocation Ratio Machine Operation & Maintenance: 15% Receiving, 70% Setups, 15% DespatchSupervisors: 7.5% Receiving, 70% Setups, 15% Inspections, 7.5% Despatch VTR Tech manufactured Components A, B, and C during the quarter. The details for each are: Particulars Component A Component B Component C Direct Material Cost (₹) 1,500 3,800 2,200 Machine Hours Used 30 520 60 Material Consignments Received 45 32 33 Machine Setups 20 22 18 Quality Inspections 12 10 20 Orders Despatched 25 90 55 Units Produced 600 13,000 2,600 Required: (i) CALCULATE the unit cost of Components A, B, and C using VTR's existing traditional costing system (overheads absorbed on machine hours basis). (ii) EXPLAIN how an Activity-Based Costing (ABC) system would be developed using the above data. Then CALCULATE the unit cost of Components A, B, and C using the ABC system, showing detailed allocation of overheads and unit cost. (iii) COMPARE the cost of component under both costing system

Suggested Answer and Working Notes:

(i) Computation of Unit Cost Using Traditional System Component A B C Machine Hrs 30 520 60 Machine Labour Cost (₹ 18/hr) 540 9,360 1,080 Direct Material 1,500 3,800 2,200 Overheads (₹ 132/hr) 3,960 68,640 7,920 Total Cost 6,000 81,800 11,200 Qty Produced 600 13000 2600 Unit Cost (₹) 10.00 6.29 4.31 Total Manufacturing Overheads ('000) Overhead Component Amount ('000) Machine Operating Expenses 140 Maintenance Costs 30 Wages of Machine Supervisors 90 Stores Handling Staff Wages 28 Packaging & Despatch Wages 42 Total Manufacturing Overhead 330 Overhead Absorption Rate = 3,30,000/2,500 hrs. = 132 per Machine Hour (ii) ABC System Development & Cost Calculation ABC Process: Identify Activities: Receiving MaterialsMachine SetupsQuality InspectionsPackaging & Despatch Allocate Overheads to Activity Pools Determine Cost Drivers and Rates Assigning the cost of activities to cost objects Overhead Allocation to Activities ('000): Activity Receiving Setups Inspections Despatch Total Machine Operation (140) 21.00 98.00 21.00 140.00 Maintenance (30) 4.50 21.00 4.50 30.00 Supervisors' Wages (90) 6.75 63.00 13.50 6.75 90.00 Stores Staff (28) 28.00 28.00 Packaging & Despatch (42) 42.00 42.00 Total ('000) 60.25 182.00 13.50 74.25 330.00 Allocation ratios: Machine Operation & Maintenance: 15% Receiving, 70% Setups, 15% DespatchSupervisors: 7.5% Receiving, 70% Setups, 15% Inspections, 7.5% Despatch Determine Cost Driver Rates: Activity Cost ('000) Driver Volume Rate per Unit Receiving 60.25 1,100 consignments 54.77 per consignment Machine Setups 182.00 950 setups 191.58 per setup Quality Inspections 13.50 700 inspections 19.29 per inspection Despatch 74.25 480 despatches 154.69 per order Assign Activity Costs to Components Component A (₹) B (₹) C (₹) Direct Labour 540 9,360 1,080 Direct Material 1,500 3,800 2,200 Receiving 45 x 54.77 = 2,464.65 32 x 54.77 = 1,752.64 33 x 54.77 = 1,807.41 Setups 20 x 191.58 = 3,831.60 22 x 191.58 = 4,214.76 18 x 191.58 = 3,448.44 Inspections 12 x 19.29 = 231.48 10 x 19.29 = 192.90 20 x 19.29 = 385.80 Despatch 25 x 154.69 = 3,867.25 90 x 154.69 = 13,922.10 55 x 154.69 = 8,507.95 Total Cost 12,435.00 33,242.40 17,429.60 Units 600 13,000 2,600 Unit Cost 20.73 2.56 6.70 (iii) Comparison Component Traditional Unit Cost (₹) ABC Unit Cost (₹) Observation A 10.00 20.73 Highly under-costed under traditional system B 6.29 2.56 Over-costed under traditional system C 4.31 6.70 Under-costed under traditional system

Topics: Activity Based Costing

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