ABC Steel Ltd has its own Captive Power Generation Unit, which has two users, Rolling Mill Department and Finishing Department. When the plans were…

CA Intermediate · Cost and Management Accounting · MTP · May 2026
ABC Steel Ltd has its own Captive Power Generation Unit, which has two users, Rolling Mill Department and Finishing Department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 2,00,000 machine hours. Annual budgeted practical capacity fixed costs are - 15,00,000 and budgeted variable costs are 5 per machine-hour. The following data are available: Rolling Mill Department Finishing Department Total Actual Usage in 2025-26 (Machine hours) 65,000 45,000 1,10,000 Practical capacity for each department (Machine hours) 1,10,000 90,000 2,00,000 Required (i) ALLOCATE the Power Generation Unit cost to the rolling mill and the finishing department using a single rate method in which the budgeted rate is calculated using practical capacity and costs are allocated based on actual usage. (ii) ALLOCATE the Power Generation Unit cost to the rolling mill and the finishing department, using the dual -rate method in which fixed costs are allocated based on practical capacity and variable costs are allocated based on actual usage. (iii) ALLOCATE the Power Generation Unit cost to the rolling mill and the finishing department using the dual-rate method in which the fixed-cost rate is calculated using practical capacity, but fixed costs are allocated to the cutting and welding department based on actual usage. Variable costs are allocated based on actual usage. (iv) COMMENT on your results in requirements (i), (ii) and (iii).

Suggested Answer and Working Notes:

Working Notes: 1. Fixed practical capacity cost per machine hour: Practical capacity (machine hours) 2,00,000 Practical capacity fixed costs (₹) 15,00,000 Fixed practical capacity cost per machine hour - 7.50 (₹ 15,00,000 ÷ 2,00,000 hours) 2. Budgeted rate per machine hour (using practical capacity): = Fixed practical capacity cost per machine hour + Budgeted variable cost per machine hour = 7.50 +5 = 12.50 (i) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using single rate method on actual usage of machine hours. Rolling Mill Department (₹) Finishing Department (₹) Total (₹) Power plants cost allocation by using actual usage (machine hours) (Refer to Working Note 2) 8,12,500 (65,000 hours × ₹ 12.50) 5,62,500 (45,000 hours × ₹ 12.50) 13,75,000 (ii) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using dual rate method. Rolling Mill Department (₹) Finishing Department (₹) Total (₹) Fixed Cost (Allocated on practical capacity for each department i.e.): (1,10,000 hours: 90,000 hours) 8,25,000 (₹ 15,00,000 × 11/20) 6,75,000 (₹ 15,00,000 × 9/20) 15,00,000 Variable cost (Based on actual usage of machine hours) 3,25,000 (65,000 hours × ₹ 5) 2,25,000 (45,000 hours × ₹ 5) 5,50,000 Total cost 11,50,000 9,00,000 20,50,000 (iii) Statement showing Power Plant's cost allocation to the Cutting & Welding Departments using dual rate method Rolling Mill Department (₹) Finishing Department (₹) Total (₹) Fixed Cost 4,87,500 3,37,500 8,25,000 Allocation of fixed cost on actual usage basis (Refer to Working Note 1) (65,000 hours × ₹ 7.50) (45,000 hours × ₹ 7.50) Variable cost (Based on actual usage) 3,25,000 (65,000 hours × ₹ 5) 2,25,000 (45,000 hours × ₹ 5) 5,50,000 Total cost 8,12,500 5,62,500 13,75,000 (iv) Comments: Under dual rate method, under (iii) and single rate method under (i), the allocation of fixed cost of practical capacity of plant over each department are based on single rate. The major advantage of this approach is that the user departments are allocated fixed capacity costs only for the capacity used. The unused capacity cost (₹ 15,00,000 -8,25,000) will not be allocated to the user departments. This highlights the cost of unused capacity.

Topics: Overheads - Absorption Costing Method

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