activity based costing final
TRANSCRIPT
Activity Based Costing
Presented ByA.L.C.S. Sudheer
L. NareshS.S. Rao
R. AvinashK. Namrata
Characteristics of ABC
Contents
Introduction
What is ABC?
Categories of ABC
Implementation of ABC
Benefits & Conclusion
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• An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.
What is ABC?
BASEDACTIVIT
YCOSTIN
G
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
Activity
• Traditionally cost accountants added a broad percentage of analysis into indirect costs
• The percentages of indirect and overhead costs rose as indirect costs were not caused equally by all products
• Moreover, when multiple products share common costs, there is a danger of one product subsidizing another
Historical development
Traditional Costing Methods.....
• Spreads overhead cost over entire customer base
• Each order “appears” to cost the same
• Orders with high profit margins subsidize orders with low profit margins
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Activity-Based Costing• Traditional allocation method
• Activity-based allocation method
Costs
Products
Costs
ProductsActivities
First stage Second stage
Need for a New System
• Amount of direct labor used in many industries has decreased
• Total overhead from depreciation on equipment, utilities, repairs, maintenance has increased
Today’s Complex Business Environment
Product Life Cycle
Use of Advanced Technology
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
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100
1 2 3 4
Composition of Cost
Direct Material Labour Overheads
Activities and Related Cost Drivers
• Calculate unit cost• Identify activities• Identify cost driver• Compute overhead rate• Assign overhead costs
Activity-Based Costing (ABC)
• What activities are being performed by the organizational resources?
• How much does it cost to perform activities?
• Why does the organization need to perform those activities?
• How much of each activity is required for the organization's products, services, and customers?
ABC systems addresses the following Questions:
• Simple traditional difference between fixed cost and variable cost
• Appropriate distinction between cost behavior patterns and volume related, diversity related, events related and time related
• Cost drivers need to be identified
COST DRIVER:Structural determinant of cost related activity
Characteristics of ABC
Three key areas of ABC:• Product cost differentiation• Activities and their cost drivers• Identification of non-value added cost
How to develop an ABC system?
SHORT-TERM LONG-TERM
Product Value Value addition
Pricing Corporate growth
Unit level activities
Batch level activities
Product level activities
Facility level activities
Categories of ABC
Allocation of Overheads
Service Dept. & Factory overheads
Assigning costs of Individual activities
Activity Cost Pools
Product lines
Application of cost driver rates
Steps to develop ABC
Identify resources
Identify activities
Identify cost
objects
Define activity drivers
Establish demands
made
Trace cost of
activities
• Identifying the functional area
• Identifying key activities involved in each functional area
• Allocating the common indirect costs to various activities in each functional area
Implementing ABC
• Identifying the most suitable cost driver in each activity under functional area for better allocation of Indirect costs to get accurate cost information
• Prepare the statement of expenditure activity-wise and comparing it with the value addition activity-wise to know the activities which are to be eliminated or need improvement for better performance of organization.
Continued..
• Material management• Stores Management• Production Management• Quality Control
Management• Personnel Management• Sales Management• Repairs and Maintenance• Administration• Public Relations
Functional areas
Ways of achieving cost reductionWays of achieving Cost Reduction
Conventional Cost System
Activity Based Cost System
Reducing set-up time Ignore or reduce direct labor
Reduce set up time to achieve
low cost
Eliminating material handling activities
Ignore or reduce direct labor
Eliminate activities to
reduce the cost of handling
Choosing an insertion process
Pick alternative with lowest unit level activities
Pick lowest cost alternative
Using common components
Using common components to achieve cost
savings; Using non-components creates no costly
penalty
Use common components
wherever possible
• Cost management and Downsizing
• Determination of Product Service Costs
• Improvements in Performance
• Product/Service Pricing
• Make or Buy Decision
• Transfer Pricing
Benefits of implementing ABC
Gaining Competitive Advantage
Gaining Competitive Advantage
Which product to promote?Analyze profit contribution & impact
What prices should we
set?
How should we measure performance?
Which customers are profitable & why?
Which distribution channels should we follow?
How ABC system supports Corporate Strategy?
• Effective and accurate• Redesigning the product• Changing the system of evaluation of new process technologies
• Report on resource spending• Improving activities• Cost drivers rate• Accurate feedback• Provides accurate information of product cost