Page 24 - MA - May 2017

COVER ST OR Y

model are given below. Example
Step 1: Determination of Cost of all products and The example explained below reveals the steps
services mentioned. In order to make easy understanding the
Step 2: The determination of the Profit of each example is restricted to only two products i.e. Product
A and Product B and only profit earned by the purely
products and services financial items during the account period under
Step 3: Apportionment of Purely Financial items consideration. The model could be extended to more
Step 4: Determination of overall profit. products and services and purely financial items for
Step 5: The identification of loss making products or the previous years also. In the model both Traditional
services and exploration of cost reduction costing method and Activity Based Costing method
techniques. were demonstrated.
Let us presume the present selling prices of the
Step 6: Explore the possibility of revising the Selling product is Rs 13 for the product A and Rs 27 for the
Price product B and there is sufficient demand in the market
Step 7: Determination of discontinuance of produce for the both products.
and services. The cost incurred for producing the Product A and
Product B are given below:-

Step 1: Determination of cost of all products and services
Determination of cost of products under Traditional Method
Table No 1
Overall
Particulars Unit cost Total
Total Cost
No of Units 2000 3000 5000
A B A B

Direct material 8 2 16000 6000 22000
Labour 4 5 8000 15000 23000

Direct Cost 12 7 24000 21000 45000
Overhead* 4 5 19555.56 24444.44 44000

Total cost 16 12 43555.56 45444.44 89000
*(Apportioned in accordance with Labour rate)
(A) ACTIVITY BASED COSTING METHOD -ALLOCATION OF OVERHEAD

Table No 2
A B Total Allocation A Allocation B Total

Purchase orders (No) 40 60 100 4000 6000 10000

Machine setup (No) 20 80 100 2000 8000 10000
Product packing (No) 10000 20000 30000 1000 2000 3000
Machine testing (no) 50 100 150 2000 4000 6000

Cleaning 100 150 250 6000 9000 15000

Total Indirect cost 15000 29000 44000

24 The Management Accountant l May 2017 www.icmai.in