Test 3: Activity Based Costing: answer key

Question 1 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. Apex Polychem Ltd is a leading manufacturer of industrial chemicals and specialty polymers. The company produces two primary product lines: Industrial Resin (IR) and Specialty Coating (SC). Annual production is 10,000 units of IR and 5,000 units of SC. The company has recently transitioned from a traditional volume-based costing system to an Activity Based Costing (ABC) system to better understand the true cost of its diverse product portfolio. The management accountant has identified three major activity cost pools. The machine setup cost pool totals ₹4,50,000, driven by the number of production runs (setups). IR requires 100 setups annually, while SC requires 50 setups. The quality inspection cost pool is ₹2,00,000, driven by the total inspection hours. IR consumes 400 inspection hours, and SC consumes 600 inspection hours. Finally, the customer order processing pool amounts to ₹1,50,000, driven by the number of customer orders. IR accounts for 300 orders, while SC accounts for 200 orders. The company operates in a highly competitive market where accurate product costing is essential for pricing and profitability analysis. There is no opening or closing work-in-progress. The management is analyzing the activity rates and the resulting cost allocations to make strategic production and pricing decisions.

What is the machine setup activity cost driver rate per setup for Apex Polychem Ltd?

1. ₹3,000 (correct answer)
2. ₹2,000
3. ₹4,500
4. ₹1,500

Answer: A — ₹3,000

Explanation. Activity Cost Driver Rate = Total Activity Cost Pool ÷ Total Cost Driver Volume. Here, Setup Cost = ₹4,50,000 and Total Setups = 100 (IR) + 50 (SC) = 150 setups. Rate = ₹4,50,000 ÷ 150 = ₹3,000 per setup. Option b is a miscalculation (₹4,50,000 ÷ 225). Option c uses the total pool value for one product. Option d uses 300 as the denominator.

Where it goes wrong. Dividing the setup cost by total units produced or using only one product's setups in the denominator.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 2 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the quality inspection cost assigned to Specialty Coating (SC)?

1. ₹80,000
2. ₹1,20,000 (correct answer)
3. ₹2,00,000
4. ₹1,50,000

Answer: B — ₹1,20,000

Explanation. Inspection Rate = Total Inspection Cost ÷ Total Inspection Hours = ₹2,00,000 ÷ (400 + 600) = ₹2,00,000 ÷ 1,000 = ₹200 per inspection hour. SC consumes 600 inspection hours. Cost assigned to SC = 600 × ₹200 = ₹1,20,000. Option a is the cost assigned to IR (400 × ₹200). Option c is the entire pool. Option d is an arithmetic error.

Where it goes wrong. Assigning the cost based on the number of units instead of the actual inspection hours consumed by SC.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 3 · 2 marks · Chapter 5: Activity Based Costing · medium

What is the total overhead cost per unit for Industrial Resin (IR) from the three activities?

1. ₹45
2. ₹46
3. ₹47 (correct answer)
4. ₹48

Answer: C — ₹47

Explanation. Setup rate = ₹3,000 (calculated above). IR setup cost = 100 × ₹3,000 = ₹3,00,000. Inspection rate = ₹200. IR inspection cost = 400 × ₹200 = ₹80,000. Order processing rate = ₹1,50,000 ÷ (300 + 200) = ₹300. IR order cost = 300 × ₹300 = ₹90,000. Total overhead for IR = ₹3,00,000 + ₹80,000 + ₹90,000 = ₹4,70,000. Per unit cost = ₹4,70,000 ÷ 10,000 units = ₹47. Option a uses a miscalculated order rate.

Where it goes wrong. Forgetting to divide the total overhead cost by the number of units to get the per-unit cost, or miscalculating one of the activity rates.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 4 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the customer order processing activity rate per order?

1. ₹250
2. ₹200
3. ₹350
4. ₹300 (correct answer)

Answer: D — ₹300

Explanation. Activity Cost Driver Rate = Total Order Processing Cost ÷ Total Number of Orders. Total orders = 300 (IR) + 200 (SC) = 500 orders. Rate = ₹1,50,000 ÷ 500 = ₹300 per order. Option a uses 600 orders, option b uses 750 orders, and option c uses 428 orders. This rate is used to allocate order processing costs to the respective products.

Where it goes wrong. Using the number of units or setups instead of the total number of customer orders.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 5 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. Zenith Consumer Care Ltd distributes its premium personal care products through three distinct customer channels: Retail (X), Wholesale (Y), and Online (Z). To enhance profitability, the company is implementing Activity Based Costing (ABC) for its customer-level operating costs. The annual order-taking activity cost pool is ₹6,00,000, driven by the number of customer orders. Retail places 2,000 orders, Wholesale places 1,000 orders, and Online places 3,000 orders. The delivery activity cost pool is ₹8,00,000, driven by the number of deliveries made to customers. Retail requires 1,500 deliveries, Wholesale requires 500 deliveries, and Online requires 2,000 deliveries. The shelf-stocking activity at customer locations costs ₹3,00,000, driven by shelf-stocking hours. Retail consumes 2,000 hours, Wholesale consumes 500 hours, and Online consumes 500 hours. The company is particularly interested in understanding how the differing service demands of these channels affect their overall profitability. Historically, the company allocated these costs based on sales revenue, but management suspects that the Online channel, with its numerous small orders and deliveries, is significantly undercosted by the traditional method. All costs are annual and there are no other customer-level costs.

What is the order-taking activity cost driver rate per order for Zenith Consumer Care Ltd?

1. ₹100 (correct answer)
2. ₹120
3. ₹80
4. ₹150

Answer: A — ₹100

Explanation. Total orders = 2,000 (Retail) + 1,000 (Wholesale) + 3,000 (Online) = 6,000 orders. Order-taking rate = Total Order-Taking Cost ÷ Total Orders = ₹6,00,000 ÷ 6,000 = ₹100 per order. Option b uses 5,000 orders. Option c uses 7,500 orders. Option d uses 4,000 orders. This rate will be applied to the order volume of each channel.

Where it goes wrong. Using total sales revenue or total deliveries instead of the actual number of customer orders.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 6 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the total delivery activity cost assigned to the Online (Z) channel?

1. ₹3,60,000
2. ₹4,00,000 (correct answer)
3. ₹4,40,000
4. ₹4,80,000

Answer: B — ₹4,00,000

Explanation. Total deliveries = 1,500 (X) + 500 (Y) + 2,000 (Z) = 4,000 deliveries. Delivery rate = ₹8,00,000 ÷ 4,000 = ₹200 per delivery. Online (Z) receives 2,000 deliveries. Delivery cost for Z = 2,000 × ₹200 = ₹4,00,000. Option a is the cost for Retail (1,500 × ₹200 = ₹3,00,000) plus an error. Option c is an incorrect rate applied.

Where it goes wrong. Using the number of orders (3,000) instead of the number of deliveries (2,000) for the Online channel.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 7 · 2 marks · Chapter 5: Activity Based Costing · medium

What is the total activity cost assigned to the Wholesale (Y) channel across all three activities?

1. ₹2,00,000
2. ₹2,25,000
3. ₹2,50,000 (correct answer)
4. ₹2,75,000

Answer: C — ₹2,50,000

Explanation. Order taking rate = ₹100. Y cost = 1,000 × ₹100 = ₹1,00,000. Delivery rate = ₹200. Y cost = 500 × ₹200 = ₹1,00,000. Shelf-stocking rate = ₹3,00,000 ÷ (2,000 + 500 + 500) = ₹3,00,000 ÷ 3,000 = ₹100 per hour. Y cost = 500 × ₹100 = ₹50,000. Total cost for Y = ₹1,00,000 + ₹1,00,000 + ₹50,000 = ₹2,50,000. Option a omits the shelf-stocking cost.

Where it goes wrong. Forgetting to include all three activity costs or using the wrong driver volume for one of the activities.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 8 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the delivery activity cost assigned to the Retail (X) channel?

1. ₹2,00,000
2. ₹2,50,000
3. ₹2,75,000
4. ₹3,00,000 (correct answer)

Answer: D — ₹3,00,000

Explanation. Delivery rate = ₹8,00,000 ÷ 4,000 deliveries = ₹200 per delivery. The Retail (X) channel receives 1,500 deliveries. Delivery cost for X = 1,500 × ₹200 = ₹3,00,000. Option a uses 1,000 deliveries, option b uses 1,250 deliveries, and option c uses 1,375 deliveries. This illustrates the assignment of activity costs based on the specific consumption of the delivery driver.

Where it goes wrong. Using the total number of orders placed by Retail (2,000) instead of the number of deliveries (1,500).

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 9 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. Vikram Steels Ltd manufactures high-tensile steel rods in two grades: Product P and Product Q. The production is organized in batches. The annual production is 5,000 units of P (batch size 100 units) and 10,000 units of Q (batch size 200 units). The company has identified three activity cost pools to assign overheads. The machine setup cost pool is ₹2,00,000, driven by the number of setups. Product P requires 50 setups, and Product Q requires 50 setups. The material handling cost pool is ₹1,50,000, driven by the number of material moves. Product P requires 200 moves, while Product Q requires 300 moves. The engineering support cost pool is ₹3,00,000, driven by engineering hours. Product P consumes 1,000 hours, and Product Q consumes 500 hours. The company is analyzing its batch-level and product-level costs to streamline operations and improve pricing. Management wants to accurately assign these costs to the products and their respective batches to identify any inefficiencies. There are no process losses, and the production volume equals sales volume for the period. The activity rates are to be computed based on the annual driver volumes, and costs assigned to products and batches accordingly.

What is the machine setup activity cost driver rate per setup for Vikram Steels Ltd?

1. ₹2,000 (correct answer)
2. ₹2,500
3. ₹3,000
4. ₹1,500

Answer: A — ₹2,000

Explanation. Total setups = 50 (Product P) + 50 (Product Q) = 100 setups. Setup rate = Total Setup Cost ÷ Total Setups = ₹2,00,000 ÷ 100 = ₹2,000 per setup. Option b uses 80 setups. Option c uses 66.67 setups. Option d uses 133.33 setups. This rate is the foundation for assigning setup costs to the respective production batches.

Where it goes wrong. Dividing the setup cost by the total number of units (15,000) instead of the total number of setups (100).

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 10 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the material handling cost per unit for Product P?

1. ₹10
2. ₹12 (correct answer)
3. ₹15
4. ₹18

Answer: B — ₹12

Explanation. Material handling rate = Total Material Handling Cost ÷ Total Moves = ₹1,50,000 ÷ (200 + 300) = ₹1,50,000 ÷ 500 = ₹300 per move. Product P requires 200 moves, so total material handling cost for P = 200 × ₹300 = ₹60,000. Cost per unit for P = ₹60,000 ÷ 5,000 units = ₹12 per unit. Option a uses ₹50,000. Option c uses 250 moves.

Where it goes wrong. Dividing the total material handling cost pool by the total units of both products instead of assigning based on moves and then per unit of P.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 11 · 2 marks · Chapter 5: Activity Based Costing · medium

What is the engineering support cost assigned to Product Q?

1. ₹1,50,000
2. ₹2,00,000
3. ₹1,00,000 (correct answer)
4. ₹3,00,000

Answer: C — ₹1,00,000

Explanation. Engineering support rate = Total Engineering Cost ÷ Total Engineering Hours = ₹3,00,000 ÷ (1,000 + 500) = ₹3,00,000 ÷ 1,500 = ₹200 per hour. Product Q consumes 500 engineering hours. Cost assigned to Q = 500 × ₹200 = ₹1,00,000. Option a is the cost assigned to P (1,000 × ₹200). Option d is the total pool.

Where it goes wrong. Assigning the cost based on the number of units or setups rather than the actual engineering hours consumed.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 12 · 2 marks · Chapter 5: Activity Based Costing · hard

What is the total overhead cost assigned to a single batch of Product P?

1. ₹6,000
2. ₹6,500
3. ₹7,000
4. ₹7,200 (correct answer)

Answer: D — ₹7,200

Explanation. Total overhead for P = Setup (50 × ₹2,000) + Material Handling (200 × ₹300) + Engineering (1,000 × ₹200) = ₹1,00,000 + ₹60,000 + ₹2,00,000 = ₹3,60,000. Product P has 50 batches (5,000 units ÷ 100 units/batch). Overhead per batch = ₹3,60,000 ÷ 50 batches = ₹7,200. Option a is the setup cost per batch. Option c is a miscalculation.

Where it goes wrong. Dividing the total overhead cost by the total units (5,000) instead of the number of batches (50) to get the cost per batch.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 13 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. A company has an activity cost pool of ₹4,50,000 and the total cost driver volume is 15,000 units. What is the activity cost driver rate?

A company has an activity cost pool of ₹4,50,000 and the total cost driver volume is 15,000 units. What is the activity cost driver rate?

1. ₹30 (correct answer)
2. ₹25
3. ₹35
4. ₹40

Answer: A — ₹30

Explanation. Activity Cost Driver Rate = Total Activity Cost Pool ÷ Total Cost Driver Volume. Rate = ₹4,50,000 ÷ 15,000 = ₹30 per unit. Option b uses 18,000 units, option c uses 12,857 units, and option d uses 11,250 units. This fundamental formula is the basis for assigning costs to products in an ABC system.

Where it goes wrong. Multiplying the cost pool by the driver volume instead of dividing the cost pool by the driver volume.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 14 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. An activity pool of ₹8,00,000 is driven by the number of machine hours. Product A consumes 10,000 machine hours and Product B consumes 15,000 machine hours. What is the activity rate per machine hour?

An activity pool of ₹8,00,000 is driven by the number of machine hours. Product A consumes 10,000 machine hours and Product B consumes 15,000 machine hours. What is the activity rate per machine hour?

1. ₹30
2. ₹32 (correct answer)
3. ₹35
4. ₹40

Answer: B — ₹32

Explanation. Total machine hours = 10,000 (A) + 15,000 (B) = 25,000 hours. Activity rate = ₹8,00,000 ÷ 25,000 = ₹32 per machine hour. Option a uses 26,667 hours. Option c uses 22,857 hours. Option d uses 20,000 hours. This rate is then multiplied by the respective hours consumed by each product to assign the cost.

Where it goes wrong. Using only one product's machine hours (e.g., 15,000) as the denominator instead of the total driver volume.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 15 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. The order processing activity rate is ₹25 per order. Product X places 1,200 orders during the year. What is the order processing cost assigned to Product X?

The order processing activity rate is ₹25 per order. Product X places 1,200 orders during the year. What is the order processing cost assigned to Product X?

1. ₹24,000
2. ₹36,000
3. ₹30,000 (correct answer)
4. ₹48,000

Answer: C — ₹30,000

Explanation. Assigned Cost = Activity Rate × Driver Volume Consumed. Assigned cost = ₹25 × 1,200 = ₹30,000. Option a uses 960 orders. Option b uses 1,440 orders. Option d uses 1,920 orders. This illustrates how activity costs are traced to cost objects based on their specific consumption of the activity driver.

Where it goes wrong. Multiplying the rate by the total number of units produced rather than the number of orders placed by Product X.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 16 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. An activity cost pool is budgeted at ₹6,00,000 for a practical capacity of 10,000 units. Actual usage of the driver is 8,000 units. What is the cost of unused capacity?

An activity cost pool is budgeted at ₹6,00,000 for a practical capacity of 10,000 units. Actual usage of the driver is 8,000 units. What is the cost of unused capacity?

1. ₹80,000
2. ₹90,000
3. ₹1,00,000
4. ₹1,20,000 (correct answer)

Answer: D — ₹1,20,000

Explanation. Activity Rate based on capacity = ₹6,00,000 ÷ 10,000 units = ₹60 per unit. Unused capacity = 10,000 - 8,000 = 2,000 units. Cost of unused capacity = 2,000 × ₹60 = ₹1,20,000. Option a uses 1,333 units. Option b uses 1,500 units. Option c uses 1,667 units. Unused capacity costs represent the expense of maintaining resources that are not currently utilized.

Where it goes wrong. Calculating unused capacity using the actual usage amount as the base instead of the difference between practical capacity and actual usage.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 17 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. A company incurs ₹5,00,000 in machining costs, driven by machine hours. Product P uses 2,000 units × 3 hours/unit and Product Q uses 4,000 units × 3.5 hours/unit. What is the machining rate per hour?

A company incurs ₹5,00,000 in machining costs, driven by machine hours. Product P uses 2,000 units × 3 hours/unit and Product Q uses 4,000 units × 3.5 hours/unit. What is the machining rate per hour?

1. ₹25 (correct answer)
2. ₹20
3. ₹30
4. ₹35

Answer: A — ₹25

Explanation. Total machine hours = (2,000 × 3) + (4,000 × 3.5) = 6,000 + 14,000 = 20,000 hours. Machining rate = ₹5,00,000 ÷ 20,000 hours = ₹25 per hour. Option b uses 25,000 hours. Option c uses 16,667 hours. Option d uses 14,285 hours. This rate will then be used to allocate the machining cost based on the actual hours consumed.

Where it goes wrong. Using the total units produced (6,000) as the denominator instead of the total machine hours (20,000).

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 18 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. Setup costs total ₹1,20,000 for 150 setups. A specific batch of Product Z requires 20 setups. What is the setup cost assigned to this batch?

Setup costs total ₹1,20,000 for 150 setups. A specific batch of Product Z requires 20 setups. What is the setup cost assigned to this batch?

1. ₹12,000
2. ₹16,000 (correct answer)
3. ₹18,000
4. ₹20,000

Answer: B — ₹16,000

Explanation. Setup rate = ₹1,20,000 ÷ 150 setups = ₹800 per setup. Cost assigned to the batch = 20 setups × ₹800 = ₹16,000. Option a uses 15 setups. Option c uses 22.5 setups. Option d uses 25 setups. This demonstrates how ABC assigns batch-level costs to specific batches based on the actual number of setups required.

Where it goes wrong. Dividing the total setup cost by the total number of units in the batch instead of multiplying the rate by the number of setups for that batch.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 19 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. A product requires 5 setups (at ₹10,000 per setup) and 500 machine hours (at ₹100 per hour). What is the total overhead assigned to the product?

A product requires 5 setups (at ₹10,000 per setup) and 500 machine hours (at ₹100 per hour). What is the total overhead assigned to the product?

1. ₹80,000
2. ₹90,000
3. ₹1,00,000 (correct answer)
4. ₹1,10,000

Answer: C — ₹1,00,000

Explanation. Setup cost assigned = 5 setups × ₹10,000 = ₹50,000. Machining cost assigned = 500 hours × ₹100 = ₹50,000. Total overhead assigned = ₹50,000 + ₹50,000 = ₹1,00,000. Option a omits the setup cost. Option b uses 4 setups. Option d uses 600 machine hours. This highlights the additive nature of ABC assignments.

Where it goes wrong. Adding the rates (₹10,000 + ₹100) and multiplying by a single volume measure, or omitting one of the activity pools.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 20 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. A customer places 250 orders in a year. The order processing activity rate is ₹40 per order. What is the order processing cost assigned to this customer?

A customer places 250 orders in a year. The order processing activity rate is ₹40 per order. What is the order processing cost assigned to this customer?

1. ₹6,000
2. ₹8,000
3. ₹9,000
4. ₹10,000 (correct answer)

Answer: D — ₹10,000

Explanation. Customer-level cost = Activity Rate × Customer's Driver Volume. Cost = ₹40 × 250 orders = ₹10,000. Option a uses 150 orders. Option b uses 200 orders. Option c uses 225 orders. ABC allows for accurate assignment of customer-level costs, highlighting that customers who place more orders consume more resources and are therefore more expensive to serve.

Where it goes wrong. Multiplying the rate by the number of units the customer purchased rather than the number of orders the customer placed.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 21 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. An activity pool has a total cost of ₹3,60,000 and an activity rate of ₹18 per unit. What is the total cost driver volume?

An activity pool has a total cost of ₹3,60,000 and an activity rate of ₹18 per unit. What is the total cost driver volume?

1. 20,000 units (correct answer)
2. 18,000 units
3. 22,000 units
4. 25,000 units

Answer: A — 20,000 units

Explanation. Activity Rate = Total Cost ÷ Total Driver Volume. Rearranging: Total Driver Volume = Total Cost ÷ Activity Rate. Volume = ₹3,60,000 ÷ ₹18 = 20,000 units. Option b uses ₹20 per unit. Option c uses ₹16.36 per unit. Option d uses ₹14.40 per unit. This calculation is useful when determining the capacity or usage levels that justify a given activity rate.

Where it goes wrong. Multiplying the total cost by the rate instead of dividing the total cost by the rate to find the volume.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 22 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. Which of the following is the most appropriate cost driver for assigning customer order processing costs?

Which of the following is the most appropriate cost driver for assigning customer order processing costs?

1. Number of units sold
2. Number of customer orders (correct answer)
3. Direct labour hours
4. Machine hours

Answer: B — Number of customer orders

Explanation. Customer order processing costs are incurred each time an order is placed, regardless of the quantity of goods in that order. Therefore, the number of customer orders is the most appropriate cost driver. Number of units sold is a unit-level driver, while direct labour hours and machine hours are volume-based drivers related to production, not order processing. Option b correctly reflects the cause-and-effect relationship.

Where it goes wrong. Confusing order-processing costs with unit-level production costs and using volume-based drivers like units sold or machine hours.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 23 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. Product X uses 2,000 units of Pool A (total cost ₹4,00,000 for 10,000 total units) and 2,000 setups of Pool B (total cost ₹6,00,000 for 5,000 total setups). What is the total cost assigned to Product X?

Product X uses 2,000 units of Pool A (total cost ₹4,00,000 for 10,000 total units) and 2,000 setups of Pool B (total cost ₹6,00,000 for 5,000 total setups). What is the total cost assigned to Product X?

1. ₹2,80,000
2. ₹3,00,000
3. ₹3,20,000 (correct answer)
4. ₹3,60,000

Answer: C — ₹3,20,000

Explanation. Pool A rate = ₹4,00,000 ÷ 10,000 = ₹40 per unit. Cost assigned = 2,000 × ₹40 = ₹80,000. Pool B rate = ₹6,00,000 ÷ 5,000 = ₹120 per setup. Cost assigned = 2,000 × ₹120 = ₹2,40,000. Total cost assigned to X = ₹80,000 + ₹2,40,000 = ₹3,20,000. Option a omits part of Pool B. Option b uses ₹100 per setup.

Where it goes wrong. Applying the same allocation base across different cost pools rather than using each pool's specific driver rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 24 · 2 marks · Chapter 5: Activity Based Costing · hard

Scenario. A company has setup costs of ₹2,40,000 for 120 setups and inspection costs of ₹1,60,000 for 800 inspection hours. Product X requires 30 setups and 200 inspection hours. What is the total cost assigned to Product X?

A company has setup costs of ₹2,40,000 for 120 setups and inspection costs of ₹1,60,000 for 800 inspection hours. Product X requires 30 setups and 200 inspection hours. What is the total cost assigned to Product X?

1. ₹80,000
2. ₹90,000
3. ₹95,000
4. ₹1,00,000 (correct answer)

Answer: D — ₹1,00,000

Explanation. Setup rate = ₹2,40,000 ÷ 120 = ₹2,000 per setup. Cost to X = 30 × ₹2,000 = ₹60,000. Inspection rate = ₹1,60,000 ÷ 800 = ₹200 per hour. Cost to X = 200 × ₹200 = ₹40,000. Total cost assigned to X = ₹60,000 + ₹40,000 = ₹1,00,000. Option a omits the inspection cost. Option b uses 25 setups. Option c is an arithmetic error.

Where it goes wrong. Incorrectly calculating one of the rates (e.g., using total units instead of setups for the setup rate) or omitting one of the pools.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)

Question 25 · 2 marks · Chapter 5: Activity Based Costing · medium

Scenario. If the total cost of an activity pool increases but the total cost driver volume remains unchanged, what is the effect on the activity cost driver rate?

If the total cost of an activity pool increases but the total cost driver volume remains unchanged, what is the effect on the activity cost driver rate?

1. The activity rate increases (correct answer)
2. The activity rate decreases
3. The activity rate remains the same
4. The activity rate fluctuates randomly

Answer: A — The activity rate increases

Explanation. Activity Cost Driver Rate = Total Activity Cost Pool ÷ Total Cost Driver Volume. Since the numerator (total cost) increases and the denominator (driver volume) remains constant, the resulting rate must increase. This higher rate will then assign a greater portion of overhead costs to the products or customers consuming the activity. Options b, c, and d represent incorrect mathematical relationships.

Where it goes wrong. Assuming the rate remains unchanged because the driver volume is constant, failing to recognize the direct relationship between pool cost and the rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 5 (Activity Based Costing)