Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 57 views

    Activity Based Costing

    Uploaded by

    Jeyakumar Venugopal
    Activity based costing (ABC) is an alternative to conventional costing that provides a more accurate assignment of overhead costs. ABC identifies activities performed in an organization and assigns costs to products based on their use of each activity. It is a 5-step process: 1) identify resources, 2) determine activities, 3) define cost objects, 4) develop resource drivers, and 5) develop cost drivers. ABC is useful when there is product diversity, customer diversity, or high overhead costs. It provides more accurate product costs and helps managers identify cost reduction opportunities.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Activity Based Costing

    Uploaded by

    Jeyakumar Venugopal
    57 views5 pages
    Activity based costing (ABC) is an alternative to conventional costing that provides a more accurate assignment of overhead costs. ABC identifies activities performed in an organization and assigns costs to products based on their use of each activity. It is a 5-step process: 1) identify resources, 2) determine activities, 3) define cost objects, 4) develop resource drivers, and 5) develop cost drivers. ABC is useful when there is product diversity, customer diversity, or high overhead costs. It provides more accurate product costs and helps managers identify cost reduction opportunities.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Activity based costing (ABC) is an alternative to conventional costing that provides a more accurate assignment of overhead costs. ABC identifies activities performed in an organization and assigns costs to products based on their use of each activity. It is a 5-step process: 1) identify resources, 2) determine activities, 3) define cost objects, 4) develop resource drivers, and 5) develop cost drivers. ABC is useful when there is product diversity, customer diversity, or high overhead costs. It provides more accurate product costs and helps managers identify cost reduction opportunities.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    57 views5 pages

    Activity Based Costing

    Uploaded by

    Jeyakumar Venugopal
    Activity based costing (ABC) is an alternative to conventional costing that provides a more accurate assignment of overhead costs. ABC identifies activities performed in an organization and assigns costs to products based on their use of each activity. It is a 5-step process: 1) identify resources, 2) determine activities, 3) define cost objects, 4) develop resource drivers, and 5) develop cost drivers. ABC is useful when there is product diversity, customer diversity, or high overhead costs. It provides more accurate product costs and helps managers identify cost reduction opportunities.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 5

    Activity Based Costing

    Requirement of Cost Systems


    • Valuation of inventory and measurement of the cost of goods sold for financial
    reporting.

    • Estimation of the costs of activities, products, services, and customers.

    • Providing economic feedback to managers and operators about process efficiency.

    Today’s businesses are working in an increasingly complex environment.

    Use of Advanced Technology

    Product Life Cycle

    Product Complexity

    Channels of Distribution

    Quality Requirements

    Product Diversity

    Conventional Costing
    • Total Cost = Material + Labour+ Overheads
    • Overheads are allocated to the products on volume based measures e.g. labour
    hours, machine hours, units produced

    Will this not distort the costing in the new environment?


    ABC provides an Alternative.
    ABC
    • ABC is a technique which involves identification of cost with each cost driving
    activity and making it as the basis for apportionment or assignment of cost over
    different cost objects.

    Conventional Costing AB Costing

    Economic
    Expenses Resources Element

    Work
    Activities Performed
    Cost Objects
    Product or
    Cost Objects service
    Basics of A B C
    • Cost of a product is the sum of the costs of all activities required to manufacture
    and deliver the product.
    • Products do not consume costs directly
    • Money is spent on activities
    • Activities are consumed by product/services

    • ABC assigns Costs to Products by tracing expenses to “activities”. Each Product


    is charged based on the extent to which it used an activity

    • The primary objective of ABC is to assign costs that reflect/mirror the physical
    dynamics of the business

    • Provides ways of assigning the costs of indirect support resources to activities,


    business processes, customers, products.
    • It recognises that many organisational resources are required not for physical
    production of units of product but to provide a broad array of support activities.

    ABC systems addresses the following Questions:


    • What activities are being performed by the organisational resources?
    • How much does it cost to perform activities?
    • Why does the oranisation need to perform those activities?
    • How much of each activity is required for the organisation’s products, services,
    and customers?

    Steps in ABC
    The objective of an ABC implementation is to relate all of the costs of doing business
    to products, services, or customers. Developing the initial model consists of the
    following five steps:

    1. Identify the Resources (expenditures) of an organization


    2. Determine Activities (work performed) that are supported by Resources
    3. Define Cost Objects (products, services, customers)
    4. Develop Resource Drivers to link Resources to Activities
    5. Develop Cost Drivers to link Activities to Cost Objects

    Step 1: Identify Resources

    Resources represent the expenditures of an organization. Examples include roduction


    labor, sales and marketing labor, occupancy and utilities, equipment, and supplies.
    These are the same costs that are represented in a traditional accounting view;unlike
    traditional accounting, ABC links these costs to products, customers, or services.

    Step 2: Identify Activities

    Activities represent the work performed in an organization. ABC Activities for the
    sales department in a typical organization might include:

    • Making sales calls to existing customers


    • Making sales calls to potential customers
    • Making customer service calls
    • Training product representatives
    • Evaluating products and improving product knowledge
    • Distributing samples
    • Attending trade shows and other events

    Traditional accounting will often break the cost of the sales department into salaries,
    benefits, allocated rent, supplies, and so on. Unlike traditional accounting, which
    reports what the costs are (i.e. salaries, benefits, rent), ABC accounts for these costs
    based on what activities caused them to occur. By determining the actual activities
    that occur in various departments, such as accounting, customer service, and sales,
    it is then possible to more accurately relate these costs to customers, products, and
    services.

    Step 3: Identify Cost Objects

    ABC provides profitability by one or more cost object, usually represented by


    products, customers, and/or services.
    Cost Object profitability is utilized to identify money losing customers, to validate
    separate divisions or business units, or to measure the performance of individual
    projects, jobs, or contracts. Defining the outputs to be viewed is an important step in
    a successful ABC implementation.

    Step 4: Determine Resource Drivers

    Resource Drivers provide the link between the expenditures of an organization and
    the Activities performed within the organization. For example, the total salary of a
    customer service representative would likely be allocated to the Activities performed
    based on the amount of time spent performing the Activity. If 50% of her time is
    spent performing the activity, taking orders for existing customers, 50% of her
    salary (including all costs such as benefits, taxes, and insurance) would be allocated
    to this Activity.

    Step 5: Determine Cost Drivers

    Determination of Cost Drivers completes the last stage of the model. Cost Drivers
    trace, or link, the cost of performing certain Activities to Cost Objects.

    For example, taking orders for existing customers may be linked to specific
    customers based on the number of orders taken, if each order takes approximately
    the same amount of time. If order taking time varies based on the customer, this
    cost may be linked based on another driver or multiple drivers.

    Building an ABC model

    Identify Identify Identify


    Resources Activities Cost
    Objects

    Define Define
    Activity Resource
    Drivers Drivers

    Enter Enter Calculate


    Enter Resource Activity Costs
    Resource Driver Driver
    Costs Qty. Qty.

    ABC: Where to Use?


    • High Overheads
    • Product Diversity or Multiple Products
    • Customer Diversity
    • Service Diversity
    • Stiff Competition
    Benefits of ABC
    - It provides more accurate and informative product cost
    - It provides more accurate measurement of activity- driving cost
    - It helps managers identify and control the cost of unused capacity
    - Understand TRUE profitability of your customers, products, or services
    -Quantify the cost of non-value added activities such as errors and reworks
    -Identify opportunities to reduce costs and/or increase efficiency
    -Obtain actionable information to negotiate price increases for unprofitable clients
    -Understand why profitability may be mediocre despite good strategic fundamentals
    -Stratify overhead costs so they can be managed more effectively

    Limitations of ABC
    • Expensive to develop and implement
    • Time consuming
    • In case of more number of activities, it is difficult to use ABC
    • If 2 products are similar, it is difficult to allocate.

    You might also like