CAF-5 · Chapter 17 · Question 11 of 20
(ABC vs. Traditional Costing) A factory uses traditional absorption based on machine hours. Total overheads are Rs. 500,000 and total machine hours are 10,000. Under an ABC analysis, it is discovered that Rs. 200,000 of the total overhead is strictly driven by machine setups (total factory setups = 200), and the remaining Rs. 300,000 is driven by machine hours. Product K uses 2,000 machine hours and requires 50 setups. What is the difference in the overhead allocated to Product K when shifting from Traditional to ABC?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 10,000 higher under ABC
Explanation
Under Traditional: Blanket Rate = 500k / 10k hrs = Rs. 50/hr. K's allocation = 2,000 hrs * 50 = Rs. 100,000. Under ABC: Setup Rate = 200,000 / 200 = Rs. 1,000/setup. Machine Rate = 300,000 / 10,000 = Rs. 30/hr. K's allocation = (50 setups * 1,000) + (2,000 hrs * 30) = 50,000 + 60,000 = Rs. 110,000. Difference = 110k (ABC) - 100k (Trad) = Rs. 10,000 higher under ABC.
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