Silver Star Ltd. manufactures four products, namely X, Y, Z, and W using the same plant and process. The following information relates to a…

CA Intermediate · Cost and Management Accounting · MTP · September 2026
Silver Star Ltd. manufactures four products, namely X, Y, Z, and W using the same plant and process. The following information relates to a production period: Product X Y Z W Output in units 800 650 500 550 Cost per unit (₹) — Direct Material 50 55 45 60 — Direct Labour 12 10 8 9 Machine hours/unit 5 hrs. 3.5 hrs. 2.5 hrs. 1.5 hrs. The four products are similar and are usually produced in production runs of 25 units and sold in batches of 10 units. Machine hour rate is currently used to absorb production overheads. The total overheads incurred by the company for the period are as follows: Overhead Category Amount (₹) Machine operation and maintenance cost 75,000 Setup costs 25,000 Store receiving 18,000 Inspection 12,000 Material handling and dispatch 3,500 During the period the following cost drivers are to be used for the overhead costs: Activity Cost Driver Setup cost Number of production runs Store receiving Requisitions raised Inspection Number of production runs Material handling and dispatch Orders executed It is also determined that: Machine operation and maintenance cost should be apportioned between setup cost, store receiving, and inspection activity in 5:3:2. Number of requisitions raised on store is 60 for each product, and the number of orders executed is 220, each order being for a batch of 10 units of a product. Required: (i) CALCULATE the total cost of each product, if all overhead costs are absorbed on a machine hour rate basis. (ii) CALCULATE the total cost of each product using activity-based costing. (iii) COMMENT briefly on the differences disclosed between overhead allocated by the present system and overhead traced under activity-based costing.

Suggested Answer and Working Notes:

3(a) (i) Overhead Absorption on Machine Hour Basis Statement Showing “Total Cost of Products" Particulars X (₹) Y (₹) Z (₹) W (₹) Direct Material 50.00 55.00 45.00 60.00 Direct Labour 12.00 10.00 8.00 9.00 Overheads 79.94 55.96 39.97 23.98 Cost of Production per unit 141.94 120.96 92.97 92.98 Output in units 800 650 500 550 Total Cost 1,13,552.10 78,622.75 46,485.03 51,140.12 [8,350 Machine Hours = (800 × 5) + (650 × 3.5) + (500 × 2.5) + (550 × 1.5)] Total Overheads = 75,000 + 25,000 + 18,000 + 12,000 + 3,500 = 133,500 Rate per hour = 133,500 ÷ 8,350 = ₹15.99 per hour (Overheads per unit = Rate per hour × Machine hours per unit) (ii) Activity Based Costing System Statement Showing "Allocation of Machine Operation and Maintenance Cost" Particulars Setup (₹) Receiving (₹) Inspection (₹) Machine Operation & Maintenance ₹75,000 to be distributed in ratio 5: 3: 2 37,500 22,500 15,000 Now add these apportioned amounts to the activity pools: Activity Pool Original Cost (₹) Machine-op apportioned (₹) Total Activity Cost (₹) Setup 25,000 37,500 62,500 Store Receiving 18,000 22,500 40,500 Inspection 12,000 15,000 27,000 Material Handling & Dispatch — — 3,500 Statement Showing "Activities / Drivers / Cost" Activity Cost (₹) Drivers Nos Cost per unit of Driver (₹) Setup 62,500 Production Runs 100 625.00 Store Receiving 40,500 Requisitions Raised 240 168.75 Inspection 27,000 Production Runs 100 270.00 Material Handling and Disp. 3,500 Orders 250 14.00 Note: Production run size = 25 units. Production Runs: X (800/25) = 32 Y (650/25) = 26 Z (500/25) = 20 W (550/25) = 22 (Total = 100) Requisitions raised = 60 for each product (Total = 240) Orders executed (batch = 10 units): X = 80; Y = 65; Z = 50; W = 55 (Total = 250) Statement Showing “Total Cost of Products" Particulars of Costs X (₹) Y (₹) Z (₹) W (₹) Direct Material (Total) 40,000 35,750 22,500 33,000 Direct Labour (Total) 9,600 6,500 4,000 4,950 Setup (Runs × 625) 20,000 16,250 12,500 13,750 Store Receiving (60 X 168.75) 10,125 10,125 10,125 10,125 Inspection (Runs × 270) 8,640 7,020 5,400 5,940 Material Handling & Dispatch (Orders × 14) 1,120 910 700 770 Total Cost 89,485.00 76,555.00 55,225.00 68,535.00 Cost per unit 111.86 117.78 110.45 124.61 (iii) Comment on the differences disclosed between overhead allocated by the present system and overhead traced under activity-based costing. Particulars X (₹) Y (₹) Z (₹) W (₹) Cost per unit (Traditional) ...(a) 141.94 120.96 92.97 92.98 Cost per unit (ABC) .......(b) 111.86 117.78 110.45 124.61 Difference ........(b) – (a) (30.08) (3.18) 17.48 31.63 Comment: The activity-based costing system reallocates overheads to products according to the true cost drivers (setups, requisitions, inspections, orders) rather than solely by machine hours. Under ABC, products X and Y show lower unit costs compared with the machine-hour method (so they were over costed by the traditional method), while products Z and W show higher unit costs (they were under costed by the traditional method). This change can materially affect pricing and product-level profitability — especially for Z and W where ABC raises unit cost significantly.

Topics: Activity Based Costing

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