final fmg22a manac abc

8/13/2019 Final Fmg22a Manac ABC

1/16

ABC System of Costing in EducationalInstitute

The case study of a service industry (educationalinstitute)

A Report submitted to:

Dr. Kanhaiya Singh

Team Members:

Akul Sharma(2211!"

Ankit #houdhary (2212$"

Ankit Kapoor (2212!"

Ankit %agrath (2212&"Ashish Arora (221'!"

tika Aggar)al (221!*"


2/16

3

ABC System of Costing in Educational Institute

#ontentsContents.................................................................................................................................2

1. INTRODUCTION................................................................................................................3

2. ADVANTAGES OF ABC SYSTEM OVER TRADITIONAL COSTING SYSTEM.................4

3. SCOPE AND OBJECTIVES OF TE STUDY....................................................................!

4. RESEARC METODOLOGY.......................................................................................... !

". TE CASE ANALYSIS.......................................................................................................#

!.IMPLEMENTATION OF NE$ COST STRUCTURE............................................................%

!.1 ABC &o'e( )o* St+'ent Se*,-e De/0*t&ent 0t Re-st*0*s O))-e.................................1

#.RECOMMENDATION AND CONCLUSION.......................................................................13

%.LIMITATIONS OF TE STUDY.........................................................................................1"

.REFERENCES..................................................................................................................1"


3/16

3


1. %TR+D,#T+%

A countrys economy in large depends on industries particularly service sectors such

as insurance company, financial institutions, health service, transportation. As more

corporate sectors venturing into service industries create competition, they are required to

provide a quality customer service at reasonable cost. A number of service firms have

gone into bankruptcy as a result of poor control over escalating overhead cost. Thus, the

survival of a firm in service industry is largely depending on the availability of timely

and quality information for decision-making and the ability to keep the operation cost at

marginal level.

Consequently, cost and management accounting concepts and techniques are not

only used in manufacturing sectors but also in service sectors to provide cost informationfor decision-making. A study found that the focus of cost management should be on decisions

and the various cost management techniques, systems and measurements that spur and help

managers to make iser economic decisions. !f the many available cost management

systems, research reveals that a bigger number of companies uses Activity- based costing

"A#C$ method in comparison ith the traditional costing system in providing timely and

quality cost information. %oever, the implementation of such system is costly and often the

idea of implementing the system is drop as a result of time consumption and lack of

e&pertise. 'n some cases, the cost for carrying out the A#C analysis is higher than the returns.

(evertheless, there is a groing body of literature, hich argues that, compared to thetraditional costing systems, Activity- #ased costing "A#C$ offers important advantages to

organi)ations.


4/16

3


2. AD-A%TA/S +0 A# SST/M +-/R TRADT+%A3 #+ST%

SST/M*rior to the introduction of A#C costing system, a number of companies, particularly

manufacturing sectors, used a traditional costing system called volume- based costing system,

hich is volume-based cost driver such as direct-labour hours, direct labour cost, or machinehours.

%ere the costs are at the most classified into to main parts i.e.+

Product cost hich is a cost assigned to goods that ere either purchased or

manufactured for resale.

Period costhere administration and selling are recogni)ed as e&penses during the

period in hich they are incurred.

'f inventories are manufactured, the product cost is relatively easy to trace to production ob

but manufacturing overhead is not easily traced to obs as these costs often bear no direct

relationship ith individual obs or units of product.

eatures of Traditional costing method+

The conventional or traditional accounting system allocates the manufacturing

overhead to the products either plant ide overhead rate or on to-stage allocation

system. The former allocates cost on a single activity base for the entire factory but

the latter assigns manufacturing overhead cost based on departmental activities.

At the first stage, the manufacturing cost is collected into cost pools and then attached

to products by a method based on unit volume of production such as direct labour

hours. Thus, the allocation of manufacturing cost depends on the types of resourcesthat the products consume. The greater the products consume the resource, the higher

the overhead attached to the products based on one particular activity base such as

direct labour hour, machine hour or direct labour cost.

This system allos for cost distortions, hich ill be greater in business units ith a

higher proportion of overhead costs. hile this approach has the advantage of

simplicity, it ill result in systematic miscosting here overheads are not volume

driven.

/esearchers noted that this system failed to reflect other resource or cost of activities that

added value to the production. !ther than that, Copper and 0aplan assert that traditional cost

and management accounting systems such as those based on standard costing and absorption

costing have measured company performance imperfectly because they have not kept up ith

the developments in production technology and consumerism. Therefore, to avoid biased

cost reporting, the allocation of overheads to cost objects should not be based on a

common volume-related measure, such as direct labour hour but on the groups of

activities which generate those overheads.

An overhead allocation based on activity centres avoids a common consequence of

traditional output-based costing system particularly under cost lo volume products. A


5/16

3


study found that overheads based on activity centres facilitate the targeting of unnecessary,

asteful, resource usage and the costly effects of over-comple& ays of running a business

process. This technique, hich is popularly knon as Activity-Based costing (ABC), is a

system that focuses attention on the costs of various activities re!uired to produce a

product or service". This system is in favour of many organi)ations in order to provide 1true2cost information for their strategic decision-making.

The A#C, first developed by Cooper and 0aplan, is a system that

. /educes the level of arbitrary cost allocations associated ith 1traditional2 costing

systems and results in more accurate product cost.

4. #esides providing more accurate product costing, A#C also improves the basis upon

hich strategic decisions, involving resource allocation, product mi&, pricing and

marketing, are made.

3. 's more effective in specific environmental conditions "enabling conditions$ such as

manufacturing comple&ity, environments ith specialty product costs and diverse

"multiple different$ business environments.

5. Can facilitate the identification of ho individual customer influences the cost of supply.

't as found that hen A#C is used in this ay, customer profitability profiles and

analysis are possible and market strategy is enhanced by this intelligence.

6. 'n the beginning, A#C cost management system as common in the manufacturing

environment here the identification of activities associated ith the products as still

less comple& and in some instances the activities ere direct. %oever, no even the

service sectors adopt A#C cost management, acknoledging the importance of cost

information for survival in the increased competition.

A number of researches revealed successful applications of A#C in private as ell in public

service sectors, such as financial institutions, hotel sectors, health centres, transport

companies, and telecommunication. Thus, the service sectors shift the cost management focus

from conventional costing system to the A#C system.


6/16

3


'. S#+4/ A%D +5/#T-/S +0 T6/ ST,D

The obectives of this research are as follos+

. A costing system that identify and eliminate non-value added costs. These are the costs of

activities that can be eliminated ith no deterioration of service quality and performances.

4. A costing system that determines the efficiency and effectiveness of all maor activities

performed in the 7niversity.

3. A costing system that identify and evaluate ne activities that can improve the future

performance of the 7niversity.

$. R/S/AR#6 M/T6+D+3+

The research methodology of this case study is a combination of both descriptive and

quantitative analyses as follos+

1. Descriptive analyses

A study of the 7niversity Annual /eport

A study of the 8epartment budgets and general ledger items

2. Quantitative analyses

Computation of !verhead rate

9uggestion of (e cost :odel

A costing model based on Activity #ased Costing is developed for /egistrar office as an

illustration.

A hypothetical case has been developed in order to study the benefits of A#C 9ystem over

traditional system in an educational 7niversity.

The figures used in the case have been picked up from the Annual /eports of a 7niversity in

:alaysia and adapted for a 7niversity in 'ndia.

The costs have been allocated to resource and activity centres on a hypothetical basis after

studying the Annual reports of different universities online. This has been done in order to

compute the overhead base on Activity #ase Costing system.


7/16

3


!. T6/ #AS/ A%A3SS

This is a hypothetical case of a 7niversity hich as established in 'ndia about seven years

ago ith a oint venture partner ith one of the foreign university. The university recogni)ed

maor drabacks ith current costing system for not being able to detect and control the

escalating operational cost. The present cost management system does not provide accurate

cost information in order to facilitate the decision planning particularly in eliminating non

added value activities. #ased on analysis, the current costing system does not achieve the

obective of directing and controlling operational activities. or e&ample, in directing, the

university requires cost data to be classified according to each departments activity in order

to avoid any activities consuming university resources ithout adding any value. As forcontrolling, the university requires a cost tool to measure the departments performance.

Therefore, the university requires a cost management system that not only provides analysis

of its products and services but also helps the management ith the strategic planning and

control of the organi)ations overall functions.

The universitys department operation is managed through budgetary control of responsibility

centres, hich is lacking of ;true cost data information. This system requires each

department head to forecast numbers in the preset budget. The preset budget only outlines

department direct traceable costs such as 9alary < ages e&penses, *rinting < 9tationary,

and Telephone < a& and reight < Courier e&penses. !ther indirect costs of university

hich are fi&ed in nature, for instance =quipment leasing, 8epreciation e&penses, 7tility

e&penses and supplies are not shon in the budget neither are they absorbed into department

budgets. 'n addition, neither direct cost nor indirect cost is disseminated to other sub divisions

of the department as per activitiy that drives the cost. This approach gives very little costing

information about the departments activities that drive the cost and, therefore, it is not

effective ay of cost monitoring.

Thus, the disadvantage of the universitys current costing model is that true cost

final fmg22a manac abc

Documents