Activity Based Costing

Presented By:-
AmitGupta.

Dharmendra Sharma.
Gautam Chaini.
Requirement of Cost
Systems
Ø Valuation of inventory and measurement of the
cost of goods sold for financial reporting.

ØEstimation of the costs of activities,

products, services, and customers.

ØProviding economic feedback to

managers and operators about process
efficiency.
Activity Based Costing.
vABC developed in the manufacturing sector
of the United States during 1970s & 1980s.
vFirst time Clearly defined by Robert s.
Kaplan & W. Bruns.
vActivity based costing is an accounting
methodology that assigns costs to activities
rather than products or services .
vThis enables resource and overhead costs to
be more accurately assigned to the products
and the services that consume them.
Today’s businesses are working in
an increasingly complex
environment.
Use of Advanced Technology

Product Life Cycle

Product Complexity
Channels of Distribution
Quality Requirements

Product Diversity
ABC systems addresses
the following
Ø What activities are being performed by the
organizational resources?
Ø How much does it cost to perform activities?
Ø Why does the organization need to perform
those activities?
Ø How much of each activity is required for the
organization's products, services, and
customers?
Building an ABC Model
Identify Identify Identify
Resources Activitie Cost
s Objects

Define Define
Activity Resourc
Drivers e
Drivers

Enter Enter Enter

Resourc Resource Activity Calculat
e Driver Qty. Driver Qty. e
Costs Costs
 ABC Steps
1. Identify activities and resources
2. Measure the costs of resources used to perform
each activity.
3. Determine cost drivers and resource-consumption
rates .
4. Assign activity costs to products by multiplying
the use of the cost drivers by the resource-
consumption rates.
A B C Steps : How?
Cost pools are groups
Steps: or categories of
individual expense
1. Form cost pools items
2. Identify activities
3. Map resource costs to activities
4. Define activity cost drivers
5. Calculate cost
A B C Steps Cont…….
q ABC assigns Costs to Products by tracing
expenses to “activities”. Each Product is
charged based on the extent to which it used an
activity.
q The primary objective of ABC is to assign costs
that reflect/mirror the physical dynamics of the
business
Activities: Types
vUnit level: Performed each time a unit is

produced.
vBatch level: Performed each time a batch is
produced.
vProduct level: Performed to support production
of different type of product.
v Customer Level: Performed to support servicing
customers
Define activity drivers
• 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.
• The selection of an activity driver reflects
a subjective trade-off between accuracy
and cost of measurement.
.
 Advantages of ABC
Ø More accurate .
Ø Understand how costs are actually consumed .
Ø Support Strategic Decisions.
Ø Identify cause and effect relationship to objectively assign cost.

Implementation restrictions
Ø Require proper planning and a commitment from upper
management.
Ø Run the risk of spending too much time, effort, and even money
on gathering and going over the data that is collected .
 ABC: Where to Use?
üHigh Overheads.
üProduct Diversity or Multiple Products.
üCustomer Diversity.
üService Diversity.
üStiff Competition
Thank you.