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    Activity Based Costing: By: Aditi Balbir

    Uploaded by

    Sonam Anand
    Activity based costing (ABC) provides a more accurate method for assigning overhead costs than traditional costing methods. ABC traces overhead expenses to the activities that drive those costs, and then assigns costs to products based on each product's use of activities. The document outlines the basics of ABC, including identifying activities, mapping resource costs to activities, defining activity drivers, and calculating costs. ABC is particularly useful when overhead costs are high, products are diverse, or competition is stiff. While more accurate, ABC also requires more effort and resources to implement than traditional costing methods.

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    Activity Based Costing: By: Aditi Balbir

    Uploaded by

    Sonam Anand
    49 views20 pages
    Activity based costing (ABC) provides a more accurate method for assigning overhead costs than traditional costing methods. ABC traces overhead expenses to the activities that drive those costs, and then assigns costs to products based on each product's use of activities. The document outlines the basics of ABC, including identifying activities, mapping resource costs to activities, defining activity drivers, and calculating costs. ABC is particularly useful when overhead costs are high, products are diverse, or competition is stiff. While more accurate, ABC also requires more effort and resources to implement than traditional costing methods.

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    ABC

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    Activity based costing (ABC) provides a more accurate method for assigning overhead costs than traditional costing methods. ABC traces overhead expenses to the activities that drive those costs, and then assigns costs to products based on each product's use of activities. The document outlines the basics of ABC, including identifying activities, mapping resource costs to activities, defining activity drivers, and calculating costs. ABC is particularly useful when overhead costs are high, products are diverse, or competition is stiff. While more accurate, ABC also requires more effort and resources to implement than traditional costing methods.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    49 views20 pages

    Activity Based Costing: By: Aditi Balbir

    Uploaded by

    Sonam Anand
    Activity based costing (ABC) provides a more accurate method for assigning overhead costs than traditional costing methods. ABC traces overhead expenses to the activities that drive those costs, and then assigns costs to products based on each product's use of activities. The document outlines the basics of ABC, including identifying activities, mapping resource costs to activities, defining activity drivers, and calculating costs. ABC is particularly useful when overhead costs are high, products are diverse, or competition is stiff. While more accurate, ABC also requires more effort and resources to implement than traditional costing methods.

    Copyright:

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    ACTIVITY BASED COSTING

    By : Aditi Balbir
    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
    Composition of Cost

    100

    0
    1 2 3 4
    Direct Material Labour Overheads
    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.


    Conventional Costing AB Costing
    Economic
    Element
    Expenses Resources

    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


    BASICS OF A B C (CONTD.)
    • 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:
    o What activities are being performed by the
    organisational resources?
    o How much does it cost to perform activities?
    o Why does the oranisation need to perform those
    activities?
    o How much of each activity is required for the
    organisation’s products, services, and customers?
    BASICS OF A B C : HOW?
    Cost pools are groups
    Steps: or categories of
    o Form cost pools individual expense
    o items
    Identify activities
    o Map resource costs to activities
    o Define activity cost drivers
    o Calculate cost
    IDENTIFY ACTIVITIES
    In developing an ABC system, the organisation identifies the
    activities being performed:

    •Activity Dictionary

    oMove material oRespond to customers

    oSchedule production oImprove products


    oPurchase material oIntroduce new products
    oInspect items oExplore new markets
    MAP RESOURCE COSTS TO
    ACTIVITIES
     Financial accounting categorises expenses by spending
    code; salaries, fringe benefits, utilities, travel,
    communication, computing, depreciation etc.

     ABC collects expenses from this financial system and drive


    them to the activities performed.
    Mapping
    ABC Records
    Activities Salaries DepreciationElectricity Supplies Travel Total
    Accounting Records
    Salaries 313,000 Business Development 20,000 25000 5000 5000 55,000

    Depreciation 155,000 Maintianing Present Business 80,000 60000 50000 5000 10000 205,000

    Electricity 132,000 Purhcasing Material 125,000 50000 20000 20000 60000 275,000

    Supplies 25,000 Set up Machines 25,000 10000 2000 37,000

    Running Machines 50,000 10000 50000 110,000


    Travel 100,000
    Resolve Quality Problems 13,000 5000 25000 43,000
    Total 725,000
    Total 313,000 155000 132000 25000 100000 725,000
    ACTIVITIES: TYPES

    o Unit level: Performed each time a unit is produced

    o Batch level: Performed each time a batch is produced

    o Product level: Performed to support production of


    different type of product
    o Customer Level: Performed to support servicing
    customers
    o Facility level: Residuary head
    DEFINE ACTIVITY DRIVERS
     The linkage between activities and cost objects, such as
    products, customers,, is accomplished by using activity
    drivers.
     An activity driver is a quantitative measure of the output
    of an activity.
     The selection of an activity driver reflects a subjective
    trade-off between accuracy and cost of measurement.
    BUILDING AN ABC MODEL

    Identify Identify Identify


    Resources Activities Cost Objects

    Define Define
    Activity Resource
    Drivers Drivers

    Enter Enter Enter


    Calculate
    Resource Resource Activity
    Costs
    Costs Driver Qty. Driver Qty.
    ABC: WHERE TO USE?
     High Overheads
     Product Diversity or Multiple Products

     Customer Diversity

     Service Diversity

     Stiff Competition
    EXAMPLE PRINTING COSTS:
     Much of the costs of printing a book are in setting up the
    document for printing.
     Suppose the set up costs per month are $168,000 and we
    do 2 set ups.
     The demand for book A is 2,000 copies requiring 1 set
    up
     The demand for book B is 40,000 copies requiring 1 set
    up
    SOLUTION
    Using ABC we obtain a cost per set up of $168,000/2
    =$84,000. Then we divide the allocated cost by the size
    of each book run.
    The printing set up cost of Book A
    = $84,000/2,000 = $42
    The printing set up cost of Book B
    = $84,000/40,000 = $2.10

    Allocating based on units alone ($4) assigns too much


    cost to each unit of book B and too little to Book A.
    ABC allocation is more accurate.
    PROS AND CONS OF ABC
    Benefits:
    • ABC is less likely than traditional costing to under cost
    or over cost products.
    • ABC may lead to improvements in cost control.

    Limitations:
    • ABC is expensive to implement relative to the
    traditional system.

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