activity based costing
TRANSCRIPT
![Page 1: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/1.jpg)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
ACTIVITY-BASED COSTING
Ankur Verma
Abhinav Parmar
Arvinderpal
ACTIVITY-BASED COSTING
Ankur Verma
Abhinav Parmar
Arvinderpal
![Page 2: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/2.jpg)
1-2
ACTIVITY BASED COSTING Traditional costing system ABC System1. Direct and indirect costs 1. The direct and indirect costs are are allocated to process allocated to activities like centres or major departments Purchases, Material handling,
Producing the goods, machine set ups, Supervising production workers, Inspecting finished
goods, Dispatching good to customers 2. Cost driver as base for 2.Cost driver as base for allocation allocation of overheads is not of overheads is based on causebased on cause and effect and effect relationship between relationship overheads and the overhead allocation base (the cost driver) Stores deptt – Labour hours or machine hours or units produced3. There is only one cost 3. There are many allocation bases
driver Or OH allocation as per activity chosen and cause
and effect base relationship
![Page 3: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/3.jpg)
1-3
Traditional, Volume-Based Product-Costing System
• Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III.
• The following information is obtained from company records:
Mode I Mode I I Mode I I IProduction: Units 10,000 20,000 4,000 Runs 1 run of 10,000
units 4 runs of
5,000 units 10 runs of 400 units
![Page 4: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/4.jpg)
1-4
Traditional, Volume-Based Product-Costing System
Additional information includes:
Mode I Mode I I Mode I I IDirect materials 50.00$ 90.00$ 20.00$ Direct labor (hr/board) 3 4 2 Setup time (hr/run) 10 10 10 Machine time (hr/board) 1 1.25 2
M o d e I M o d e I I M o d e I I ID i r e c t m a t e r i a l s 5 0 . 0 0$ 9 0 . 0 0$ 2 0 . 0 0$ D i r e c t l a b o r 6 0 . 0 0 8 0 . 0 0 4 0 . 0 0 B u d g e t e d m a n u f a c t u r i n g o v e r h e a d $ 3 , 8 9 4 , 0 0 0
Manufacturing overhead is determined as follows
![Page 5: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/5.jpg)
1-5
Traditional, Volume-Based Product-Costing System
Mode I Mode I I Mode I I IUnits produced 10,000 20,000 4,000 Direct labor (hr/unit) 3 4 2 Total hours 30,000 80,000 8,000
Total hours required 118,000
Budgeted manufacturing overhead $3,894,000 Budgeted direct-labor hours 118,000
= $33 per hour
M o d e I M o d e I I M o d e I I ID i r e c t l a b o r ( h r / u n i t ) 3 4 2 O v e r h e a d r a t e p e r h o u r 3 3$ 3 3$ 3 3$ O v e r h e a d p e r u n i t 9 9$ 1 3 2$ 6 6$
![Page 6: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/6.jpg)
1-6
Traditional, Volume-Based Product-Costing System
With these product costs, Aerotech established target selling prices (Cost × 125%).
Mode I Mode I I Mode I I IDirect materials 50.00$ 90.00$ 20.00$ Direct labor 60.00 80.00 40.00 Manufacturing overhead 99.00 132.00 66.00 Total 209.00$ 302.00$ 126.00$
Mode I Mode I I Mode I I ICost per unit 209.00$ 302.00$ 126.00$ Target selling price 261.25 377.50 157.50
209.00 x 1.25
![Page 7: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/7.jpg)
1-7
Activity Based Costing System (ABC)
ABC systems follow a two-
stage procedure to assign
overhead costs to products.
![Page 8: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/8.jpg)
1-8
Activity Based Costing System (ABC)
ABC systems follow a two-stage procedure to assign overhead costs to products.
Stage OneIdentify significant
activities and assign overheadcosts to each activity in
proportion to resources used.
![Page 9: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/9.jpg)
1-9
Activity Based Costing System (ABC)
Stage TwoIdentify cost drivers
appropriate to each activityand allocate overhead to
the products.
ABC systems follow a two-stage procedure to assign overhead costs to products.
![Page 10: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/10.jpg)
1-10
ABC System
1. Identify major activities
activity consists of aggregation of tasks having common characteristics)
e.g. Activity: purchase of materials :
Tasks: receiving a purchase request, inviting quotations, selecting supplier, placing orders, receiving material
![Page 11: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/11.jpg)
1-11
2. Assigning costs to Activity Cost Centers:
Cost incurred on these activities are
assigned to these Activity Cost Centers.
Direct costs are traced directly.
Indirect costs are assigned to activities on the
basis of cause and effect cost drivers.
![Page 12: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/12.jpg)
1-12
There must be a cause - effect relationship between the overheads to be allocated and the allocation base otherwise inaccurate allocation of overheads will occur.
For an example, it would be wrong to allocate overheads of stores dept. on the basis of labor hours.
It should be more appropriately based on number of units handled or used in production process.
![Page 13: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/13.jpg)
1-13
3. Selecting cost drivers for allocating costs to cost objects
The costs accumulated for an activity cost centre
are then allocated to different cost objects.
For this, a separate activity cost driver or allocation rate is used.
In ABC analysis, the tracing of overheads to cost objects requires that cost behavior must be understood so that appropriate cost drivers are identified.
![Page 14: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/14.jpg)
1-14
Identifying activities and cost driversdepends upon type of activity, Volume related or not volume related
Major activity
1. Processing orders for Purchase of materials/ Stores
2. Handling materials and Parts
3. Inspection of material and parts purchased
4. Setting up production procedures
Associated costs
1. Labor cost of employees working in purchase dept. 2. Labor cost of stores, depreciation of machines used for moving materials 3. Labor cost of inspection team, Depr. Of testing equipments 4. Labor cost of works involved in set-ups and depr. of set up equipments
Cost drivers
1. No. of purchase orders processed
2. No. of materials and parts requisitions
3. No. of receipts of materials and parts
4. No. of set ups
![Page 15: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/15.jpg)
1-15
Identifying activities and cost driversDepends upon type of activity, Volume related or not volume related
Major activity
5. Producing the goods
6. Supervising production workers
7. Inspecting finished goods
8. Dispatching good to customers
Associated costs
5. Depreciation of machines
6. Salary of assembly supervisors
7. Labor cost of inspectors and depreciation of test equipments
8. Labor cost of packing and cost ofPacking materials
Cost drivers
5. No. of machine hours
6. No. of assembly labor hours
7. No. of inspections
8. No. of boxes packed
![Page 16: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/16.jpg)
1-16
Two Key Points
A large proportion of non-unit-level activities
A unit-level cost driver, such as direct labor, machine hours, or throughput, will not be able to assign the costs of non-unit-level activities accurately.
Product diversity
When the consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs.
![Page 17: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/17.jpg)
1-17
Cost Drivers
A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost
driver, we must consider . . .
Degree ofCorrelation
Cost ofMeasurement
BehavioralEffects
![Page 18: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/18.jpg)
1-18
Direct versus Indirect Costs
Volume-Based Costing
All production costs except direct
materials and direct labor are lumped together in one
overhead cost pool.
Activity-Based Costing
An effort is made to account for as many costs as possible as
direct costs of production.
IndirectCosts
![Page 19: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/19.jpg)
1-19
Interviewing and Paper Trails
The information for ABC systems initially comes from interviews with employees in the support departments and a review of each department’s records.
![Page 20: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/20.jpg)
1-20
Storyboarding
A procedure used to develop a detailed process flow chart, which visually
represents activities and the relationships among activities.
Step1
Step2
Step3
Step4
These are the steps wefollow to build amemory board.
![Page 21: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/21.jpg)
1-21
Machinerycost pool
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
![Page 22: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/22.jpg)
1-22
Engineeringcost pool
Engineering salaries Engineering software
Engineering supplies Depreciation
![Page 23: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/23.jpg)
1-23
Property taxes
Insurance
Security
Plant depr.
Plant mgmt.
Plant maint.
Facilitycost pool
![Page 24: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/24.jpg)
1-24
Overhead CostsTotal budgeted cost = $3,894,000
ActivityCostPools
Machinerycost pool
$1,212,600
Setupcost pool
$3,000
Engineeringcost pool$700,000
Facilitycost pool$507,400
UnitLevel
BatchLevel
Product-Sustaining
Level
FacilityLevel
Identificationof ActivityCost Pools
Activitymust bedone oneach unitproduced.
Activityperformedon eachbatch
produced.
Activities needed to supportan entire product line
Activity required in orderfor the productionprocess to occur.
![Page 25: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/25.jpg)
1-25
Receiving/Inspectioncost pool $200,000
Material-Handlingcost pool $600,000
Quality-Assurancecost pool $421,000
Packaging/Shippingcost pool $250,000
Machinerycost pool
$1,212,600
Setupcost pool
$3,000
Engineeringcost pool$700,000
Facilitycost pool$507,400
UnitLevel
BatchLevel
Product-Sustaining
LevelFacilityLevel
![Page 26: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/26.jpg)
1-26
Machinery Cost PoolTotal budgeted cost = $1,212,600
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
Activitycostpool
STAGE ONE
Various overheadcosts relatedto machinery
![Page 27: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/27.jpg)
1-27
Calculatethe pool
rate
Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour
CostAssignment
STAGE TWO
=
=
Mode I:$28.20 per hr.
1 hr. per unit$28.20 per unit
Mode II:$28.20 per hr.
1.25 hr. per unit$35.25 per unit
Mode III:$28.20 per hr.
2 hr. per unit$56.40 per unit
![Page 28: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/28.jpg)
1-28
Calculation oftotal setup cost
Setup Cost PoolTotal budgeted cost = $3,000
Activitycostpool
STAGE ONE
Total budgeted setup cost$20 per hour10 hr. per setup
$200 cost per setup15 production runs
3,000$ Total
![Page 29: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/29.jpg)
1-29
Calculatethe pool
rate
Budgeted Setup Costs $3,000Planned Production Runs 15 runs $200 per run
CostAssignment
STAGE TWO
=
=
Mode I: (1 Run)
= $.02 per unit
$200 per run10,000 units per run
Mode II: (4 Runs)
= $.04 per unit
$200 per run5,000 units per run
Mode III: (10 Runs)
= $.50 per unit
$200 per run400 units per run
![Page 30: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/30.jpg)
1-30
Various overheadcosts related
to engineering
Engineering salaries
Engineering supplies
Engineering software
Depreciation
Engineering Cost PoolTotal budgeted cost = $700,000
Activitycostpool
STAGE ONE
![Page 31: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/31.jpg)
1-31
Allocate basedon engineering
transactions
CostAssignment
STAGE TWO
Engineering Cost PoolTotal budgeted cost = $700,000
Mode I:
= $17.50 per unit
25% × $700,00010,000 units
Mode II:
= $15.75 per unit
45% × $700,00020,000 units
Mode III:
= $52.50 per unit
30% × $700,0004,000 units
![Page 32: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/32.jpg)
1-32
Exh.5-9
Various overheadcosts related
to generaloperations
Plant depr.
Plant mgmt.
Plant maint.
Property taxes
Insurance
Security
Facility Cost PoolTotal budgeted cost = $507,400
Activitycostpool
STAGE ONE
![Page 33: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/33.jpg)
1-33
Exh.5-9
Budgeted Facilities Cost $507,400Budgeted Direct-Labor Hours 118,000 $4.30/hour
CostAssignment
STAGE TWO
=
=
Mode I:$4.30 per hr.
× 3 hr. per unit$12.90 per unit
Mode II:$4.30 per hr.
× 4 hr. per unit$17.20 per unit
Mode III:$4.30 per hr.
× 2 hr. per unit$8.60 per unit
Calculatethe pool
rate
![Page 34: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/34.jpg)
1-34
Other Overhead Costs
Board Overhead × % ÷ Units = Cost/UnitMode I 200,000$ × 6% ÷ 10,000 = 1.20$ Mode II 200,000 × 24% ÷ 20,000 = 2.40 Mode III 200,000 × 70% ÷ 4,000 = 35.00
Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 600,000$ × 7% ÷ 10,000 = 4.20$ Mode II 600,000 × 30% ÷ 20,000 = 9.00 Mode III 600,000 × 63% ÷ 4,000 = 94.50
Material-Handling Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 421,000$ × 20% ÷ 10,000 = 8.42$ Mode II 421,000 × 40% ÷ 20,000 = 8.42 Mode III 421,000 × 40% ÷ 4,000 = 42.10
Quality-Assurance Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 250,000$ × 4% ÷ 10,000 = 1.00$ Mode II 250,000 × 30% ÷ 20,000 = 3.75 Mode III 250,000 × 66% ÷ 4,000 = 41.25
Packaging and Shipping Cost Pool
![Page 35: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/35.jpg)
1-35
Board Overhead × % ÷ Units = Cost/UnitMode I 250,000$ × 4% ÷ 10,000 = 1.00$ Mode II 250,000 × 30% ÷ 20,000 = 3.75 Mode III 250,000 × 66% ÷ 4,000 = 41.25
Packaging and Shipping Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 421,000$ × 20% ÷ 10,000 = 8.42$ Mode II 421,000 × 40% ÷ 20,000 = 8.42 Mode III 421,000 × 40% ÷ 4,000 = 42.10
Quality-Assurance Cost Pool
Other Overhead Costs
Board Overhead × % ÷ Units = Cost/UnitMode I 200,000$ × 6% ÷ 10,000 = 1.20$ Mode II 200,000 × 24% ÷ 20,000 = 2.40 Mode III 200,000 × 70% ÷ 4,000 = 35.00
Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/UnitMode I 600,000$ × 7% ÷ 10,000 = 4.20$ Mode II 600,000 × 30% ÷ 20,000 = 9.00 Mode III 600,000 × 63% ÷ 4,000 = 94.50
Material-Handling Cost Pool
$14.82
![Page 36: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/36.jpg)
1-36
Product Cost from ABC
M o d e I M o d e I I M o d e I I ID i r e c t m a t e r i a l s 5 0 . 0 0$ 9 0 . 0 0$ 2 0 . 0 0$ D i r e c t l a b o r 6 0 . 0 0 8 0 . 0 0 4 0 . 0 0 M a c h i n e r yS e t u pE n g i n e e r i n gF a c i l i t i e sO t h e rT o t a l
These are the new product costs when Aerotech uses ABC.
![Page 37: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/37.jpg)
1-37
Product Cost from ABC
Mode I Mode II Mode IIIDirect materials 50.00$ 90.00$ 20.00$ Direct labor 60.00 80.00 40.00 Machinery 28.20 35.25 56.40 Setup 0.02 0.04 0.50 Engineering 17.50 15.75 52.50 Facilities 12.90 17.20 8.60 Other 14.82 23.57 212.85 Total 183.44$ 261.81$ 390.85$
These are the new product costs when Aerotech uses ABC.
![Page 38: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/38.jpg)
1-38
Distorted Product CostsBoth original and ABC target selling prices are
based on (Cost × 125%).
M o d e I M o d e I I M o d e I I I T o t a lT r a d i t i o n a l c o s t i n g209 .00$ 302 .00$ 126 .00$ A B C c o s t i n g 183 .44 261 .81 390 .85 u n i t s 10 ,000 20 ,000 4 ,000
T o t a l c o s t sT r a d i t i o n a l A B C
![Page 39: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/39.jpg)
1-39
Distorted Product CostsBoth original and ABC target selling prices are
based on (Cost × 125%).
M o d e I M o d e I I M o d e I I I T o t a l
T r a d i t i o n a l c o s t i n g2 0 9 .0 0$ 3 0 2 .0 0$ 1 2 6 .0 0$ N A
A B C c o s t i n g 1 8 3 .4 4 2 6 1 .8 1 3 9 0 .8 5 n a
u n i t s 1 0 ,0 0 0 2 0 ,0 0 0 4 ,0 0 0 n a
T o t a l c o s t s
T r a d i t i o n a l 2 ,0 9 0 ,0 0 0 6 ,0 4 0 ,0 0 0 5 0 4 ,0 0 0 8 6 3 4 0 0 0
A B C 1 8 3 4 4 0 0 5 2 3 6 2 0 0 1 5 6 3 4 0 0 8 6 3 4 0 0 0
![Page 40: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/40.jpg)
1-40
Distorted Product CostsBoth original and ABC target selling prices are
based on (Cost × 125%).
M o d e I M o d e I I M o d e I I IT r a d i t i o n a l c o s t i n g 209 .00$ 302 .00$ 126 .00$ A B C c o s t i n g 183 .44 261 .81 390 .85
O r i g i n a l t a r ge t s e l l i n g p r i c eA B C t a r ge t s e l l i n g p r i c e
.
![Page 41: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/41.jpg)
1-41
Distorted Product CostsBoth original and ABC target selling prices are
based on (Cost × 125%).
Mode I Mode II Mode IIITraditional costing 209.00$ 302.00$ 126.00$ ABC costing 183.44 261.81 390.85
Original target selling price 261.25 377.50 157.50 ABC target selling price 229.30 327.26 488.56
[$209.00 × 1.25] [$183.44 × 1.25]
The selling price of Mode I and II are reducedand the selling price for Mode III is increased.
![Page 42: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/42.jpg)
1-42
Can you identify any problems Aerotech is likely to face as a result of this distortion?
Mode I Mode II Mode IIITraditional costing 209.00$ 302.00$ 126.00$ ABC costing 183.44 261.81 390.85 Cost distortion per unit 25.56 40.19 (264.85) Units produced 10,000 20,000 4,000 Total cost distortion 255,600 803,800 (1,059,400)
Traditional costing understates the costof complex, low volume products.
Distorted Product Costs
![Page 43: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/43.jpg)
1-43
Indicators of Need for ABC
Line managers do notbelieve the product
costs reports
Marketing does notuse costs reports for
pricing decisions
Product-line profitmargins are hard
to explain
Sales are increasing,but profits are declining.
Some products thathave reported high
profit margins are notsold by competitors
Direct labor is asmall percentage
of total costs
![Page 44: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/44.jpg)
1-44
Activity-Based Management
The use ofABC costing information
to helpmanagement
make decisions
![Page 45: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/45.jpg)
1-45
Activity-Based Management
Activity-based costing establishes relationshipsbetween overhead costs and activities so that
we can better allocate overhead costs.
Activity-based management focuses on managing activities to reduce costs.
![Page 46: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/46.jpg)
1-46
Two-Dimensional ABC and Activity-Based Management
Activities
![Page 47: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/47.jpg)
1-47
Two-Dimensional ABC and Activity-Based Management
Cost Objects
Activities
Resource costs
Cost Assignment View
![Page 48: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/48.jpg)
1-48
Two-Dimensional ABC and Activity-Based Management
ActivityTriggers
Cost Objects
Activities
RootCauses
Process ViewActivity Analysis
Resource costs
Cost Assignment View
PerformanceMeasures
Activity Evaluation
![Page 49: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/49.jpg)
1-49
Elimination of Non-Value-Added Costs
Nonvalue-added
activities
NecessaryUnnecessary
Activities
Reduce orEliminate
Continually Evaluate
and Improve
![Page 50: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/50.jpg)
1-50
Using ABM to Eliminate Non-Value-Added Activities and Costs
1. Identify Activities.
2. Identify Non-Value-Added Activities.
3. Understand Activity Linkages, Root Causes, and Triggers.
4. Establish Performance Measures.
5. Report Non-Value-Added Costs.
Specifyparts
Selectvendor
Receiveparts
Producegoods
Inspectfinishedgoods
Reworkdefectiveproducts
![Page 51: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/51.jpg)
1-51
Using ABM to Eliminate Non-Value-Added Activities and Costs
Inspection time
Process time
Storage time
Move time Waiting time
![Page 52: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/52.jpg)
1-52
Customer Profitability Analysis
Customer profitability analysis usesactivity-based costing to determine
the activities, costs, and profit associated with serving particular customers.
![Page 53: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/53.jpg)
1-53
Customer Profitability Analysis
Orderssmall
quantities.
Ordersfrequently.
Oftenchangesorders.
Requiredspecial
packaging.
Demandfast
service.
A costly customer
![Page 54: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/54.jpg)
1-54
Customer Profitability Analysis
Customer-Related Activities Cost Driver Base Cost Drive
Rate Order processing Purchase orders 150$ Sales contacts (phone calls, faxes, etc.) Contacts 100 Sales visits Visits 1,000 Shipment processing Shipments 200 Billing and collection Invoices 160 Design/engineering change orders Design changes 4,000 Special packaging Units packaged 40 Special handling Units handled 60
A company may use these customerrelated costs to help determine the
profitability of each customer.
![Page 55: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/55.jpg)
1-55
Just-in-Time Inventory and Production Management
No materials are purchased and no products are manufactured until they are needed.
The primary goal of aJIT production system is
to reduce or eliminateinventories at everystage of production.
![Page 56: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/56.jpg)
1-56
Key Features of the JIT Approach
Smooth, uniform production rate
Pull method of production
Purchase is small lot sizes
Quick, inexpensive setups
High quality materials
Effective preventive maintenance
Teamwork
Multiskilled workers
![Page 57: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/57.jpg)
1-57
JIT Purchasing
Long-termcontracts with
suppliers.
Only a fewsuppliers.
Parts deliveredin small lots.
Minimalinspection of
materials.
Groupedpayments to
vendor.
![Page 58: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/58.jpg)
1-58
• Activity based costing in service industry• As useful as in mfg. industry• Mangers want more detailed and accurate
information about the cost of producing products and services they are selling
• Airlines, ins co, banks, hospitals, fin service firms, hotels railroads,
• Air France, American express, Bank of America, DHL, Fed Ex, US postal service
![Page 59: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/59.jpg)
1-59
ABC at service companies:
Identifying
Activities Activity cost pools Cost drivers
Classification of activities at • Unit level : • batch level, • product sustaining level, • facility (general operations) level
![Page 60: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/60.jpg)
1-60
Bajaj Allianze General Insurance Co. LtdClaims Department Classification of activities at • Unit level : Entering initial claim into computer• batch level: moving a batch of claims from one
processing step to the next• product sustaining level: maintenance of the
medical service provider network ( physicians, hospitals )
• facility (general operations) level: general administration of claims business unit
![Page 61: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/61.jpg)
1-61
• ABC at Delaware medical centre (Primary Care Unit- OPD)
• Patient Appointment • New routine extended complex• Continuing routine extended complex• Every appointment needs• Regd. nurse 1 : vital signs/preparing patient for
Primary health care professional• PHCP 1: physician / intern / resident doctor or
nurse practitioner
![Page 62: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/62.jpg)
1-62
• ABC team identified : • Activities cost drivers
Physician time Physician minutes with patient
Practitioner nurse time P-Nurse minutes with patient
Intern or resident time Intern minutes with patient
Regd. Nurse time Regd. Nurse minutes with patient
Clerical time: new patients New patient visits
Clerical time : continuing Continuiing patient visits
Billing Billing lines (items on a bill)
Facility Patient visits (both new and continuing)
![Page 63: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/63.jpg)
1-63
• Activity : physician time• Cost driver : physician minutes with patient• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 960000 240000 4 R 80000 320000 8000 $40• E 100000 400000 5000 $80• C 60000 240000 2000 $120
• Activity Nurse Practitioner time• Cost driver : NP minutes with patient• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 90000 30000 3 R 12000 36000 1200 $30• E 10000 30000 500 $60• C 8000 24000 320 $75
![Page 64: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/64.jpg)
1-64
• Activity : intern or resident time• Cost driver : intern or resident minutes with patient• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 412500 125000 3.30 R 40000 132000 4000 $33• E 50000 165000 2500 $66• C 35000 115500 1000 $115
• Activity : Rgd. nurse time• Cost driver : RN minutes with patient• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 281980 245200 1.15 R 132000 151800 13200 $11.50• E 80000 92000 8000 $11.50• C 33200 38180 3320 $11.50
![Page 65: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/65.jpg)
1-65
• Activity : Clerical time –new patients • Cost driver : New patients number• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 135300 12300 11.00 R 7200 79200 7200 $11• E 3000 33000 3000 $11• C 2100 23100 2100 $11
• Activity : Cleical time – continuing patients • Cost driver : cont. patients number• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 61100 12220 5.00 R 6000 30000 6000 $5• E 5000 25000 5000 $5• C 1220 6100 1220 $5
![Page 66: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/66.jpg)
1-66
• Activity : Billing • Cost driver : Billing lines on a bill• Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 38480 76960 0.50 R 26400 13200 13200 $1.00• E 24000 12000 8000 $1.50• C 26560 13280 3320 $4.00
• Activity : Facility• Cost driver : number of new plus cont. patients visits • Cost cost driver rate PV driver activity no. of activity• pool qty Type qty cost visits cost /p• 245200 24520 10.00 R 13200 132000 13200 $10• E 8000 80000 8000 $10• C 3320 33200 3320 $10
![Page 67: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/67.jpg)
1-67
• Costing of service• 1. Each patient sees either a physician or PN or
intern or resident – not all four • 2. each patient is either a new patient or a
continuing patient and not both. • 3. to compute cost of particular appointment, we
should select only one of primary health care professionals, and select one of the two clerical time categories –new or continuing.
• 4. finally since every appointment involves RN , billing, and use of primary care unit facility, all of these activities must be included in the cost calculation.
![Page 68: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/68.jpg)
1-68
• Cost of extended appointment for a new patient seeing a nurse practitioner
• Activity Cost • Nurse practitioner time • RN time• Clerical time –new patients• Billing• Facility• Total 94.00
![Page 69: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/69.jpg)
1-69
• Cost of extended appointment for a new patient seeing a nurse practitioner
• Activity cost • Nurse practitioner time 60.00• RN time 11.50 • Clerical time –new patients 11.00• Billing 1.50 • Facility 10.00
• Total 94.00
![Page 70: Activity based costing](https://reader034.vdocument.in/reader034/viewer/2022052410/5554d38cb4c9051b6e8b4ad5/html5/thumbnails/70.jpg)
1-70
THANK YOU