A XYZ company supplies and maintains a range of printers for business customers. The sales department is responsible for selling the printers and…

CA Intermediate · Cost and Management Accounting · RTP · May 2026
A XYZ company supplies and maintains a range of printers for business customers. The sales department is responsible for selling the printers and related consumables such as ink and paper. The service department provides after-sales support, including routine preventive maintenance and repair services in the event of equipment breakdown. Customers are charged a fee per print, and this rate varies depending on the type and capacity of the printer. There is one customer per machine. The company's existing cost system uses a single overhead rate, based on total sales revenue from print charges, to charge the cost of the service department's support activities to each type of printer. The service manager has suggested that the print charge should more accurately reflect the costs involved. The company's accountant has decided to implement an activity-based costing (ABC) system and has obtained the following information about the support activities of the service department: Activity Cost driver Overheads per annum ₹ '000 Customer account handling No. of Customers 126 Planned maintenance Scheduling No. of planned maintenance visit 480 Unplanned maintenance scheduling No. of unplanned maintenance visit 147 Spare part procurement No. of purchase orders 243 Other overheads No. of machines 600 Total overheads 1,596 The following data have also been collected for each machine size: Desktop Inkjet Printers Office Laser Printers High-Volume Production colour Printers Charge per copy 0.03 0.04 0.05 Average number of copies per year per machine 60,000 1,20,000 1,80,000 Number of machines 300 800 500 Planned maintenance visits per machine per year 4 6 12 Unplanned maintenance visits per machine per year 1 1 2 Total number of purchase orders per year 500 1,200 1,000 Cost of parts per maintenance visit 100 300 400 Labour cost per maintenance visit 60 80 100 (a) Calculate the annual profit per machine for each of the three sizes of machine, using the current basis for charging the costs of support activities to machines. (b) Calculate the annual profit per machine for each of the three sizes of machine using activity-based costing (ABC). (c) Explain the potential benefits to the company of using an activity-based costing system.

Suggested Answer and Working Notes:

(a) Calculation of single overhead rate based on sales revenue Desktop Inkjet Printers Office Laser Printers High-Volume Production colour Printers Total Sales revenue 1,800 × 300 = 5,40,000 4,800 × 800 = 38,40,000 9,000 × 500 = 45,00,000 88,80,000 Overheads 15,96,000 Overheads/ Sales revenue 18% Cost per machine 1,800 × 18% = 324 4,800 × 18% = 864 9,000 × 18% = 1,620 (b) Profit per machine Desktop Inkjet Printers Office Laser Printers High-Volume Production colour Printers Copy charge per machine (60,000 × ₹ 0.03) 1,800 (1,20,000 × 0.04) 4,800 (180,000 × ₹ 0.05) 9,000 Cost of parts per machine (₹ 100 × 5) (500) (₹ 300 × 7) (2,100) (₹ 400 × 14) (5,600) Labour cost per machine (₹ 60 × 5) (300) (₹ 80 × 7) (560) (₹ 100 × 14) (1,400) Overhead cost (324) (864) (1,620) Profit per machine 676 1,276 380 Cost driver rates Activity Cost Driver Overheads ₹ '000 No. of cost drivers Cost per driver ₹ Customer account handling Number of customers 126 300 + 800 + 500 = 1,600 79 per customers* Planned maintenance scheduling Number of planned maintenance visits 480 (300 × 4) + (800 × 6) + (500 × 12) = 12,000 40 per planned maintenance visit Unplanned maintenance scheduling Number of unplanned maintenance visits 147 (300 × 1) + (800 × 1) + (500 × 2) = 2,100 70 per unplanned maintenance visit Spare part procurement Number of purchase orders 243 (500 + 1,200 +1,000) = 2,700 90 per purchase order Other overheads Number of machines 600 (300 + 800 + 500) = 1,600 375 per machine * Round off Overhead cost per machine Desktop Inkjet Printers Office Laser Printers High-Volume Production colour Printers Customer account handling = 79 = 79 = 79 Planned maintenance scheduling (₹ 40 × 4) = 160 (₹ 40 × 6) = 240 (₹ 40 × 12) = 480 Unplanned maintenance scheduling (₹ 70 × 1) = 70 (₹ 70 × 1) = 70 (₹ 70 × 2) = 140 Spare part procurement (₹ 90 × 500/300) = 150 (₹ 90 × 1,200/800) = 135 (₹ 90 × 1,000/500) = 180 Other overheads 375 375 375 Total overhead cost per machine 834 899 1,254 ABC profitability analysis Desktop Inkjet Printers Office Laser Printers High-Volume Production colour Printers Copy charge per machine 1,800 4,800 9,000 Parts and labour per machine (800) (2,660) (7,000) Overhead cost per machine (834) (899) (1,254) Profit per machine using ABC 166 1,241 746 (c) The answer should include the following points: The generation of more accurate product/service costs resulting in improved decision-making;Improved cost management by focusing on activity cost managementMore accurate profitability analysisThe implementation of ABC will enable the company to adopt activity-based budgeting

Topics: Activity Based Costing

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