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    Module 11. Activity Based Costing

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    Najla
    1) The document discusses Activity Based Costing (ABC) and how it differs from traditional costing methods. 2) ABC relates resource consumption to activities and outputs produced, providing better cost allocation compared to traditional methods. 3) ABC involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs to determine production costs associated with outputs.

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    Module 11. Activity Based Costing

    Uploaded by

    Najla
    266 views24 pages
    1) The document discusses Activity Based Costing (ABC) and how it differs from traditional costing methods. 2) ABC relates resource consumption to activities and outputs produced, providing better cost allocation compared to traditional methods. 3) ABC involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs to determine production costs associated with outputs.

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    Activity Based Costing

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    1) The document discusses Activity Based Costing (ABC) and how it differs from traditional costing methods. 2) ABC relates resource consumption to activities and outputs produced, providing better cost allocation compared to traditional methods. 3) ABC involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs to determine production costs associated with outputs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    266 views24 pages

    Module 11. Activity Based Costing

    Uploaded by

    Najla
    1) The document discusses Activity Based Costing (ABC) and how it differs from traditional costing methods. 2) ABC relates resource consumption to activities and outputs produced, providing better cost allocation compared to traditional methods. 3) ABC involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs to determine production costs associated with outputs.

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    of 24

    Module 11

    ACTIVITY BASED COSTING

    Dr. Varadraj Bapat


    Activity Based Costing
    (ABC)
    2

    Concept of ABC
    Traditional Costing V/s ABC
    Treatment of cost under ABC
    Steps of ABC
    Benefits
    Limitations
    Activity Based Management: ABM
    Relation between ABC & ABM
    Dr. Varadraj Bapat
    Reasons to choose the
    right way of costing
    3

    In business, arriving at the


    correct cost is very important,
    because it:
    identifies money-makers and
    money losers;
    finds an economic break-even
    point;
    Dr. Varadraj Bapat
    4

    facilitates opportunities for cost


    control.
    permits comparison of different
    options; and
    enables strategic decision
    making.

    Dr. Varadraj Bapat


    The Concept of ABC
    5

    Activity-Based
    Costing
    Departmental
    Overhead i ty
    Rates ex
    pl
    o m
    Plant-wide fC o
    Overhead e l
    v
    Rate Le
    Overhead Absorption
    Dr. Varadraj Bapat
    The Concept of ABC
    6

    Overhead Absorption
    Departmental Department D1 OH
    Overhead Rate = Overheads
    Rates Apportioned /
    Machine Hours

    Plant-wide Plant OH Rate =


    Overhead Overhead Cost /
    Rate Machine Hours
    Dr. Varadraj Bapat
    Introduction
    7

    ABC is a costing system,


    which focuses on activities
    performed to produce
    products.
    ABC relates cost (resources
    consumed) to work
    accomplished (outputs
    produced).
    Dr. Varadraj Bapat
    8

    ABC is a management tool that


    provides better allocation of
    resources.
    The ABC or unit cost goal is a
    benchmark that represents an
    expectation of the cost
    incurred for the production of
    an output.
    Dr. Varadraj Bapat
    9

    ABC aligns costs to outputs


    thereby increasing cost
    visibility, and is useful in
    forecasting financial
    baselines.
    Dr. Varadraj Bapat
    Traditional
    Costing V/s ABC
    10

    ABC Traditional

    Resources Everything in Resources


    Organization

    Consume Traced by Resource Allocate


    Drivers
    What is actually
    Activities being done Cost Centre

    Consume Traced by Activity


    Drivers
    -Products/Services - Products
    Objects Objects
    - Customers - Services
    - Etc
    ABCs Basic Premise
    11

    Cost objects consume activities.


    Activities consume resources.

    This consumption of resources is

    what drives costs.


    Understanding this relationship is

    critical to successful budget


    management.
    Dr. Varadraj Bapat
    Treatment of
    12
    Costs under ABC
    In ABC, products are assigned the
    overhead costs that are supposed to
    be related to the allocation base.
    Non-manufacturing costs

    Manufacturing costs

    Plant wide Overhead Rate

    Departmental Overhead Rates

    Costs of idle capacity

    Dr. Varadraj Bapat


    ABCs Basic Steps
    13

    1 . Analyze activities.
    2 . Gather cost data.
    3 . Trace costs to activities.
    4 . Establish output measures.
    5 . Analyze costs.

    Dr. Varadraj Bapat


    ABCs Basic Benefits
    14

    Makes it possible to determine


    production cost traced to
    outputs.
    Targets areas needing
    management attention.
    Encourages the consideration of
    alternative methods of
    production.
    Highlights operational efficiency.
    Dr. Varadraj Bapat
    15

    Identifies financial benchmarks


    for activity performance.
    Generates more information to
    measure and reward
    performance, and prioritizes
    activities for cost reductions.
    Provides a common managerial
    framework among support
    activities.
    Dr. Varadraj Bapat
    Limitations of ABC
    16

    Trade-off between expense and


    accuracy.
    Need for more precise data

    Need of full support of top level

    management, and support of


    ABC based performance review.
    Dr. Varadraj Bapat
    17

    Cases of overstated costs and


    under-stated margins and
    mistakes in pricing and other
    critical decisions.

    Dr. Varadraj Bapat


    18

    Activity Based
    Management
    18

    Activity based management involves


    any use of ABC information to support
    the organizations strategy, improve
    operations, or manage activities and
    their resulting costs.

    Dr. Varadraj Bapat


    19

    19

    Activity Based Costing


    establishes relationships between
    overhead costs and activities so that
    we can better allocate overhead
    costs.
    Activity-based management
    focuses on managing activities to
    reduce costs.
    Dr. Varadraj Bapat
    20

    Relation ABC and ABM


    20

    Cost Assignment View

    Resource ABM
    Resource costs
    costs
    Process View
    Activity Analysis Activity Evaluation

    Root
    Root Activity
    Activity Performance
    Performance
    Causes
    Causes Triggers
    Triggers Measures
    Measures
    Activities

    Cost
    Cost Objects
    Objects
    Dr. Varadraj Bapat
    21

    Eliminating non-
    21
    value added costs
    using ABM

    Identifying Activities
    Identifying non-value added activities
    Understanding activity linkage, root
    causes and triggers
    Establishing performance measures
    Reporting non value added costs
    Dr. Varadraj Bapat
    22

    22

    ABM seeks to satisfy


    following customers needs
    Lower costs
    Higher quality
    Faster response time
    Greater innovation

    Dr. Varadraj Bapat


    23

    23

    Customer
    Profitability Analysis

    Customer profitability analysis


    uses activity-based costing to
    determine the activities, costs and,
    profit associated with serving
    particular customers.
    Dr. Varadraj Bapat
    24
    Customer Profitability
    Analysis
    24

    A costly customer is one:


    Demands
    Orders faster
    small service
    quantities
    Requires
    special
    packaging

    Often
    changes Orders
    orders frequently

    Dr. Varadraj Bapat

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