Activity Based

Costing -
Dabur
APO GROUP – 9

A B H I N AV G U L A T I – 2 1 0 1 0 3 0 0 2

M A N A N G U P TA – 2 1 0 1 0 1 0 5 0

P R AT E E K J A I N – 2 1 0 1 0 3 1 1 7

R A J AT S H A R M A – 2 1 0 1 0 1 1 5 7

SIDDHI DAS ADHIKARI – 210103153

TEJAS SEHTIA - 210103221

 What is Activity Based Costing?
 Activity-Based Costing (ABC) is a costing method which assigns overhead and indirect costs to
associated products and services.

 Unlike traditional costing methods, this accounting method of costing acknowledges the relationship
between costs, overhead activities, and produced items, attributing indirect costs to products with less
arbitrariness.
 However, some indirect costs, such as the salaries of management and office workers, are difficult to
attribute to a product.

 Activity-based costing is used to gain a better understanding of expenses, allowing businesses to

develop a better pricing strategy.
 How to calculate Activity-Based
Costing?
The ABC calculation is done in the following way:

1. Identify all the processes needed to create the particular product.

2. Divide the processes into cost pools, which contain all of the specific expenses associated with
each activity—for example, manufacturing. Calculate each cost pool's total overhead.

3. Assign cost drivers to each cost pool activity, such as hours or units.

4. Divide the total overhead in each cost pool by the total cost drivers to get the cost driver rate.

5. To get the cost driver rate, divide each cost pool's total overhead by the total cost drivers.

6. The cost driver rate is multiplied by the number of cost drivers.

 Dabur India Ltd.
• With a legacy of over 130 years, Dabur India Ltd. is one of the leading FMCG companies in India.
Dabur specializes in ayurvedic products.

• Consumer care has been the Leading revenue generation segment for Dabur as it accounts to about
60% of the revenue.

• Dabur has a portfolio of over 250 products in the herbal/Ayurvedic section.

• Dabur has 20 state-of-the-art manufacturing facilities across the globe out of which 12 are present in
India, with Baddi being the biggest manufacturing plant.
 Types of products
There are 2 types of products which are produced by Dabur. The first one is Standard product
which is produced in large batches. The other one is the custom product which is produced in
comparatively smaller batches.
Dabur India Standard Product Dabur India Custom Product
Annual Sales (units) 12217 11349
Sales Price (per unit) 62 83
Batch Size (units) 1000 50
Direct Labor Time/ per unit 2 2.5
Direct laor rate per hour 8 8
Direct Input Cost per unit 22 32
Number of Custom parts per unit 1 4
Number of Set-ups per batch 1 3
Separate Material per batch 1 1

Number of sales invoice- issues per year 50 240

 Traditional method of costing
In this method, the overhead costs are taken as a whole and not separately for different products.
Below are the overall indirect overhead costs incurred by Dabur:

Overhead Cost Analysis USD Cost Drivers

Set Up Costs 73307 Number of Set Ups

Special part handling cost 60577 Number of Special Parts

Customer invoicing cost 28645 Number of Invoices

Material handling cost 62616 Number of Batches

Other overheads 107498 Labor Hours

Total Overheads 332643 (1+2+3+4+5)

Overhead Recovery Rate formula:

Overhead Recovery Rate = Total Overheads / Number of Labor Hours
Overhead Recover Rate = 332643 / (12217x2) + (11349x2.5)
Overhead Recovery Rate = 6.3 Per Hour
Product / Service Costs - Adding Direct and Indirect Costs
 We can assign indirect costs to individual items using the Overhead Recovery Rate Calculation.
We're simply assigning variable or indirect expenses based on the number of hours labour takes to
make standard and special products.

 Using the Overhead Recovery Rate formula, total cost per unit can be computed using the usual
technique by adding together raw material costs, labour costs, and indirect cost allocation.

Standard Product Custom Product

Direct Costs :
Labour Hrs* Labour rate 16 20
Material 22 32
Indirect Costs :
Overheads (recovery rate * hours) 12.6 15.75
Total Costs per unit (1+2+3) 50.6 67.75

 The Total Cost per unit of Standard product is 50.6

 Total Cost per unit of Custom product is 67.75

 Return on Sales Calculations for Dabur India
 Return on Sales indicators allow a company to focus its resources where they will yield the best
results. We can calculate the profit per unit by subtracting the cost per unit of the product from the
sales price of the product.
 Custom products have a bigger profit per unit than regular products. These figures on their own
don't provide a lot of information because price is often a product of market factors. We should look
at - Return on Sales per Unit if we want to dig deeper.

Standard Product Custom Product

Rs. Per unit Rs. Per unit

Selling Price 62 83

Total Cost 50.6 67.75

Profit 11.4 15.25

Return On Sales 18.39% 18.373%

 ABC method of costing
In the ABC method, all the overhead costs are taken separately for all the different products.

Overhead (a) Standard (b) Custom Diver (c) Total Diver (e) Driver Rate (f) Standard Total (g) Custom Total Standard Unit Custom Unit
Cost Driver Diver Volume Volume Volume a+b (d) Costs USD (d/c) Cost a*e Cost b*e Costs Costs
Set Up Costs Set-up per 12.00 720.00 732.00 73307.00 100.15 1201.75 72105.25 0.10 6.35
Batch

Special part Special 12217.00 45396.00 57613.00 60577.00 1.05 12845.52 47731.48 1.05 4.21
handling cost Parts per
unit

Customer Invoices per 50.00 240.00 290.00 28645.00 98.78 4938.79 23706.21 0.40 2.09
invoicing cost year

Material Number of 12.22 226.98 239.20 62616.00 261.78 3198.12 59417.88 0.26 5.24
handling cost Batches

Other Labor 24434.00 28372.50 52806.50 107498.00 2.04 49740.20 57757.80 4.07 5.09
overheads Hours

Total Overheads = 5.89 22.97

 Total Cost Using ABC Technique
Add together the direct cost, raw material cost, and ABC derived per unit indirect cost to get the
total cost per unit of standard and custom products.

Standard Product Custom Product

Direct Costs :

Labor 16 20

Hours * Cost of Labor per Hours

Material 22 32

Indirect Costs :

ABC- Overhead 5.89 22.97

Total Costs Per Unit (1+2+3) 43.89 74.97

The Total Cost per unit of Standard product is 43.89

The Total Cost per unit of Custom product is 74.97

Return on Sales Using ABC Costing Analysis
Standard Product Custom Product

USD per Unit USD per Unit

Selling Price 62 83

Total Cost 43.89 74.97

Profit 18.11 8.03

Return on Sales 29.21 9.671

Under the ABC approach, the profit per unit of a standard product is higher than that of a
personalized product. We can readily infer that ABC is a lot more effective costing strategy for
Dabur India because it prevents unnecessary cost allocation to Standard product by comparing
the Return on Sales numbers under both traditional and ABC techniques. Dabur India should
concentrate on conventional products rather than personalized products because standard
products generate significantly larger sales returns.
Conclusion

 By taking the price same, we saw from the ABC method that the return on sales is much
lower in the custom products than the standard products
 The cost of producing custom product is higher than the standard but the pricing is kept close
 Traditional method is successful for pricing for the companies with low customisability and
need for simplicity
 ABC method is time consuming and is costly but is more effective to price the products
correctly
 It expands understanding of overheads and cost drivers; and makes exorbitant and non-
esteem adding exercises more apparent
Thank You!