gim ankit abc system

8/7/2019 Gim Ankit ABC System

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Activity Based CostingSystem

&

Activity based Management

Presented by:-Ankit Dekate


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DEFINITION

According to R. Cooper and R.S Kaplan ABCsystem calculate the cost of individual activitiesand assign costs to cost objects such as productsand services on the basis of the activities

undertaken to produce each product or service.

Activity Based Costing has been developed as amore modern absorption costing method to

overcome the problem of undercosting andovercosting and to produce more accurateproduct costs.


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ACTIVITY-BASED COSTING MODEL

ACTIVITY-BASED COSTING MODEL

Cost of ResourcesCost of Resources

ActivitiesActivities

Costs assigned using driver tracing

and direct tracing

ProductsProducts

Costs assigned using activity

drivers


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FEATURES OF ACTIVITY BASEDCOSTING SYSTEM

ABC system is a tool for refining a costing system It involves the creation of smaller cost pool linked

to the different activities. Cost collection is a made on the measurement of

activity performed by each activity cost pool. Cost in each cost pool have a cause and effect

relationship with the cost allocation base over aperiod of time.

Some of the costs in cost pool can also traceddirectly to products which leads to improvementin cost accuracy since no assumption is madeabout the cause and effect relationship betweenthe cost pool and the cost allocation base.


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IMPORTANT OF ABCSYSTEM

Cost object - it refers to an item for which

cost measurement is required:

E.g.: A product ,a service or a customer. Cost driver a cost driver is any factor or forcethat cause a change in the cost of an activity isdivided in to two part.

1) Resource cost driver

2) Activity cost driver


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Resource cost driver

It is a measure of the quantity of

resources consumed by an activity. It is used to assign thecost of a resource to an activity or cost pool.

o Activity cost driverIt is a measure of the frequency and

intensity of demand, placed on activities by cost objects.It is used to assign activity costs to cost objects.


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Identify the direct costs of products:-

The direct cost of products/ objects maycomprise direct materials cost, direct labour cost and directexpenses.

Relating the overhead to the activities:-After identifying the organizations

activities, the various items of overhead are related toactivities, both support and primary, that caused them.

Spreading the support activities across theprimary activities:-

The spreading of supporting activities acrossthe primary activities is done on some suitable base, whichreflects the use of the support activity.


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Determining the activities cost drivers:-

The determination of the activity cost drivers isdone in order to relate the overheads collected in cost poolsto the cost objects or products.

Calculating the activity cost drivers:-

= Total Cost of Activity

Activity Driver

Computing the total costs of products or costobjects :-

The total costs of the products shall be computedby adding all direct and indirect costs assigned to them.


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ACTIVITY-BASED MANAGEMENT

ABM describes management decisions that use

activity-based costing information to satisfy

customers and improve profits.

Product pricing and mix decisions

Cost reduction and process improvement decisions

Design decisions


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THE RELATIONSHIP OF ABCAND ABM


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PROCESS VALUE ANALYSIS

Process value analysisFundamental to activity-based responsibility

accountingFocuses on accountability for activities

rather than costsEmphasizes the maximization of systemwide

performance instead of individualperformance

Process value analysis is concernedwith:Driver analysisActivity analysisPerformance measurement


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Driver analysis is the effort expended to identifythe factors that are the root causes of activity costs.

Activity analysis is the process of identifying,describing, and evaluating the activities an

organization performs. Activity analysis should produce four outcomes:

What activities are performed.

How many people perform the activities.

The time and resources are required to perform the activities. An assessment of the value of the activities to the

organization.


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Value-added activitiesNecessary to remain in business

By mandate (e.g., comply with SEC reportingrequirements)

May contain nonessential actions that createunnecessary cost.

Nonvalue-added activities All activities other than those essential to remain

in business


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Nonvalue-added activitiesScheduling

Uses resources to determine access to processes

MovingUses resources to move inventory among

departments

WaitingUses resources while waiting for next process

InspectingUses resources to ensure conformance to

standards

StoringUses resources while goods are held in inventory


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Kaizen costing: constant incrementalimprovement, including cost reductionthrough activity managementActivity elimination

Focus on eliminating nonvalue-added activities

Activity selectionChoose among sets of competing strategies

Activity reductionDecrease time and resources required by an

activity

Activity sharingUse economies of scale to increase efficiency


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Assessing activity performance Financial measures

Nonfinancial measures

Dimensions of performance assessment Efficiency

Quality

Time


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BENCHMARKING

Benchmarking is an improvement processthat is used to identify best practice within apeer group and facilitate its incorporationinto your organization


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TH

ANK

YOU..

gim ankit abc system

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