p


p



@ Define Activity-Based Costing

@ Differentiate ABC & Through put costing

@ Explain procedure of ABC with example

Submitted by:-
Atul Sharma
L-2010-BS-03-MBA
]
 



@ Cost accounting:-A type of accounting process that aims

to capture a company's costs of production by assessing
the input costs of each step of production as well as
fixed costs such as depreciation of capital equipment.

@ Cost accounting will first measure and record these costs

individually, then compare input results to output or
actual results to aid company management in measuring
financial performance.
§





  

ÕTo compete successfully, companies

must change the way they report and
manage costs. This means replacing
old institutions of cost accounting and
inventory valuation.´
V


 

@ aluation of inventory and measurement of the

cost of goods sold for financial reporting.

@ Estimation of the costs of activities, products,

services, and customers.

@ Providing economic feedback to managers and

operators about process efficiency.







@ Total Cost = Material + Labour+ Overheads

@ Overheads are allocated to the products on

volume based measures e.g. labour hours,
machine hours, units produced
m












@ Due to the historic background of traditional

cost accounting methods, they tend to use
direct labor - or other volume related allocation
bases - for cost assignment purposes.

@ But as overhead has grown and new

technologies have come, it goes without saying
that assigning costs based on only 5 - 15% (in
most companies) of total costs is highly risky.
p 

 p


Costs are assigned

according to the
 
relationship between
activities (the actual
process) and cost objects,
which is captured using
drivers.
p

 

 p !

@ p

 

 (p ) is a costing model that
identifies activities in an organization and assigns the
cost of each activity resource to all products and services
according to the actual consumption by each

@ ]n this way an organization can precisely estimate the

cost of its individual products and services for the
purposes of identifying and eliminating those which are
unprofitable and lowering the prices of those which are
overpriced.

 
p

 



@ Cost of a product is the sum of the costs of all

activities required to manufacture and deliver
the product.

@ Products do not consume costs directly

@ Money is spent on activities

@ Activities are consumed by product/services


 
p

 


 
!

@ ABC assigns Costs to Products by tracing expenses to

Õactivities´. Each Product is charged based on the extent
to which it used an activity

@ Provides ways of assigning the costs of indirect support

resources to activities, business processes, customers,
products.

@ ]t recognizes that many organizational resources are

required not for physical production of units of product
but to provide a broad array of support activities.
6





@ Vesource drivers measure the demands placed

on resources by activities and are used to
assign costs of resources to activities.

@ Example: Consider the activity of maintaining

equipment. This activity consumes resources
such as parts, equipment, tools, labour, and
energy (power to run the equipment and
tools).
6






@ The linkage between activities and cost

objects, such as products, customers, is
accomplished by using activity drivers.

@ An activity driver is a quantitative measure of

the output of an activity.
p


 "

@ ‰nit level: Performed each time a unit is

produced
@ Batch level: Performed each time a batch is
produced
@ Product level: Performed to support production
of different type of product
@ Customer Level: Performed to support
servicing customers
@ Facility level: Vesiduary head


p 


]
 ]
 ]





 
  







 




 



 
 












 
  
 

p  "
 


@ A costing methodology that focuses on capacity
utilization is called "throughput costingÕ

@ An accounting method that allocates costs to

specific products or services or activities such
as production, delivery or maintenance based
on breakdowns of cost drivers is called ABC
J 

@ me will assume that a company has annual

manufacturing overhead costs of $2,000,000²
of which $200,000 is directly involved in
setting up the production machines. During the
year the company expects to perform 400
machine setups. Let¶s also assume that
the batch sizes vary considerably, but the
setup efforts for each machine are similar.
J 
!
@ The cost per setup is calculated to be $500 ($200,000 of
cost per year divided by 400 setups per year). ‰nder
activity based costing, $200,000 of the overhead will be
viewed as a batch level cost. This means that $200,000
will first be allocated to batches of products to be
manufactured, and then be assigned to the units of
product in each batch. For example, if Batch X consists
of 5,000 units of product, the setup cost per unit is
$0.10 ($500 divided by 5,000 units). ]f Batch Y is
50,000 units, the cost per unit for setup will be $0.01
($500 divided by 50,000 units). For simplicity, let¶s
assume that the remaining $1,800,000 of manufacturing
overhead is caused by the production activities that
correlate with the company¶s 100,000 machine hours.
J 
!
For our simple two-activity example, let's see how the
rates for allocating the manufacturing overhead would
look 
 activity based costing and 

activity
based costing
J 
!
@ §ext, let's see what impact these different allocation
techniques and overhead rates would have on the per unit cost
of a specific unit of output. Assume that a company
manufactures a batch of º


units and it produces 50 units
per machine hour, here is how the cost assigned to the units
with activity based costing and without activity based costing
compares:
J 
!
@ ]f a company manufactures a batch of º



units and
produces 50 units per machine hour, here is how the cost
assigned to the units with ABC and without ABC compares:
V 
@ mith activity based costing the cost per unit decreases from
$0.46 to $0.37 because the cost of the setup activity is spread
over 50,000 units instead of 5,000 units.
@ mithout ABC, the cost per unit is $0.40 regardless of the
number of units in each batch. ]f companies base their selling
prices on costs, a company „
using an ABC approach might
lose the large batch work to a competitor who bids a lower
price based on the lower, 


 overhead cost of
$0.37.
@ ]t¶s also possible that a company not using ABC may find itself
being the low bidder for manufacturing small batches of
product, since its $0.40 is lower than the ABC model of $0.46
for a batch size of 5,000 units.
@ mith its bid price based on manufacturing overhead of $0.40²
but a true cost of $0.46²the company may end up doing lots
of production for little or no profit.
THANK YOU