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    Activity Based Costing Final

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    Namrata Kamrushi
    Activity-based costing (ABC) is an overhead cost allocation system that assigns overhead costs to products and services through tracing costs to activities and then assigning costs to cost objects based on cost drivers. ABC addresses limitations of traditional costing methods by more accurately tracing how indirect costs are generated and assigning them based on factors like volume, diversity, events, and time. Implementing ABC involves identifying activities, costs, and cost drivers to better understand product costs and non-value added activities. This supports strategic decisions around pricing, product promotion, and performance evaluation.

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    Activity Based Costing Final

    Uploaded by

    Namrata Kamrushi
    75 views27 pages
    Activity-based costing (ABC) is an overhead cost allocation system that assigns overhead costs to products and services through tracing costs to activities and then assigning costs to cost objects based on cost drivers. ABC addresses limitations of traditional costing methods by more accurately tracing how indirect costs are generated and assigning them based on factors like volume, diversity, events, and time. Implementing ABC involves identifying activities, costs, and cost drivers to better understand product costs and non-value added activities. This supports strategic decisions around pricing, product promotion, and performance evaluation.

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    Activity-based costing (ABC) is an overhead cost allocation system that assigns overhead costs to products and services through tracing costs to activities and then assigning costs to cost objects based on cost drivers. ABC addresses limitations of traditional costing methods by more accurately tracing how indirect costs are generated and assigning them based on factors like volume, diversity, events, and time. Implementing ABC involves identifying activities, costs, and cost drivers to better understand product costs and non-value added activities. This supports strategic decisions around pricing, product promotion, and performance evaluation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    75 views27 pages

    Activity Based Costing Final

    Uploaded by

    Namrata Kamrushi
    Activity-based costing (ABC) is an overhead cost allocation system that assigns overhead costs to products and services through tracing costs to activities and then assigning costs to cost objects based on cost drivers. ABC addresses limitations of traditional costing methods by more accurately tracing how indirect costs are generated and assigning them based on factors like volume, diversity, events, and time. Implementing ABC involves identifying activities, costs, and cost drivers to better understand product costs and non-value added activities. This supports strategic decisions around pricing, product promotion, and performance evaluation.

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    Download as PPTX, PDF, TXT or read online from Scribd
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    of 27

    Activity Based Costing

    Presented By A.L.C.S. Sudheer L. Naresh S.S. Rao R. Avinash K. Namrata

    Contents
    1 2 3 4 5

    Introduction What is ABC? Characteristics of ABC Categories of ABC

    Implementation of ABC
    Benefits & Conclusion

    What is ABC?

    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.

    ACTIVITY

    BASED

    COSTING

    Activity
    Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.

    Historical development

    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

    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

    Activity-Based Costing
    Traditional
    Costs

    allocation method
    Products

    Activity-based

    allocation method

    Costs First stage

    Activities

    Products 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

    Todays Complex Business Environment Use of Advanced Technology

    Product Life Cycle


    Product Complexity

    Channels of Distribution
    Quality Requirements

    Product Diversity

    Composition of Cost
    100

    0 1 2 3 4 Direct Material Labour Overheads

    Activities and Related Cost Drivers

    Activity-Based Costing (ABC)


    Calculate unit cost Identify activities Identify cost driver Compute overhead rate Assign overhead costs

    ABC systems addresses the following Questions:


    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?

    Characteristics of ABC

    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

    How to develop an ABC system?


    Three key areas of ABC:

    Product cost differentiation Activities and their cost drivers Identification of non-value added cost SHORT-TERM
    Product Value Pricing

    LONG-TERM
    Value addition Corporate growth

    Categories of ABC
    Unit level activities Batch level activities Product level activities Facility level activities

    Allocation of Overheads
    Service Dept. & Factory overheads Activity Cost Pools Product lines

    Assigning costs of Individual activities

    Application of cost driver rates

    Steps to develop ABC


    Identify resources Trace cost of activities

    Identify activities

    Establish demands made Define activity drivers

    Identify cost objects

    Implementing ABC

    Identifying the functional area Identifying key activities involved in each functional area Allocating the common indirect costs to various activities in each functional area

    Continued..

    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.

    Functional areas

    Material management Stores Management Production Management Quality Control Management Personnel Management Sales Management Repairs and Maintenance Administration Public Relations

    Ways of achieving cost reduction


    Ways of achieving Cost Reduction Reducing set-up time Conventional Cost System Ignore or reduce direct labor Activity Based Cost System Reduce set up time to achieve low cost

    Eliminating material handling activities Choosing an insertion process

    Ignore or reduce direct labor Pick alternative with lowest unit level activities

    Eliminate activities to reduce the cost of handling Pick lowest cost alternative

    Using common components

    Using common components to achieve cost savings; Using noncomponents creates no costly penalty

    Use common components wherever possible

    Benefits of implementing ABC


    Cost management and Downsizing Determination of Product Service Costs Improvements in Performance

    Product/Service Pricing
    Make or Buy Decision Transfer Pricing

    Gaining Competitive Advantage


    Which product to promote? Analyze profit contribution & impact

    What prices should we set?

    Gaining Competitive Advantage

    Which customers are profitable & why?

    How should we measure performance?

    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

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