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9. presentation2 abc

  1. 1. Nimbus Continuous Improvement Training : ABC Costing nandan@nimbusconsulting.net Phnom Penh, Cambodia May 16-20, 2011 www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  2. 2. Continues ImprovementPrasac MFI Ltd, Cambodia www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  3. 3. Activity Based Costing What? Why? How? www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  4. 4. Requirement of Cost Systems• Valuation 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. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  5. 5. Today’s businesses are working in anincreasingly complex environment.Use of Advanced TechnologyProduct Life CycleProduct ComplexityChannels of DistributionQuality RequirementsProduct Diversity www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  6. 6. Composition of Cost100 0 1 2 3 4Direct Material Labour Overheads www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  7. 7. Conventional Costing• Total Cost = Material + Labour+ Overheads• Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units producedWill this not distort the costing in thenew environment? ABC provides an Alternative. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  8. 8. Conventional Costing AB Costing Economic Element Expenses Resources Work Activities Performed Cost Objects Product or Cost Objects service www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  9. 9. Activity-Based Costing• Traditional allocation method Costs Products• Activity-based allocation method Costs Activities Products First stage Second stage www.nimbusconsulting.net, Email:9 info@nimbusconsulting.net
  10. 10. Basics of A B C• 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 www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  11. 11. Basics of A B C (contd.)• ABC assigns Costs to Products by tracing expenses to “activities”. Each Product is charged based on the extent to which it used an activity• The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  12. 12. Basics of A B C (contd.)• Provides ways of assigning the costs of indirect support resources to activities, business processes, customers, products.• It recognises that many organisational resources are required not for physical production of units of product but to provide a broad array of support activities. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  13. 13. ABC systems addresses the following Questions:• What activities are being performed by the organisational resources?• How much does it cost to perform activities?• Why does the oranisation need to perform those activities?• How much of each activity is required for the organisation’s products, services, and customers? www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  14. 14. Basics of A B C : How? Cost pools are groups or categories of individualSteps: expense items 1. Form cost pools 2. Identify activities 3. Map resource costs to activities 4. Define activity cost drivers 5. Calculate cost www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  15. 15. Identify ActivitiesIn developing an ABC system, the organisation identifies the activities being performed: Activity Dictionary•Move material •Respond to•Schedule customersproduction •Improve products•Purchase material •Introduce new•Inspect items products •Explore new markets www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  16. 16. Map resource costs to activities• Financial accounting categorises expenses by spending code; salaries, fringe benefits, utilities, travel, communication, computing, depreciation etc. •ABC collects expenses from this financial system and drive them to the activities performed. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  17. 17. Mapping ABC Records Activities Salaries Depreciation lectricity Supplies Travel E Total Accounting RecordsSalaries 313,000 Business Development 20,000 25000 5000 5000 55,000Depreciation 155,000 Maintianing Present Business 80,000 60000 50000 5000 10000 205,000Electricity 132,000 Purhcasing Material 125,000 50000 20000 20000 60000 275,000Supplies 25,000 Set up Machines 25,000 10000 2000 37,000 Running Machines 50,000 10000 50000 110,000Travel 100,000 Resolve Quality Problems 13,000 5000 25000 43,000Total 725,000 Total 313,000 155000 132000 25000 100000 725,000 www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  18. 18. Activities: Types • Head Office Level • Branch Level • Department Level • Customer Level • Field Staff Level www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  19. 19. 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. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  20. 20. Activities DriversUnit LevelAcquire and Use material for containers No. of ContainersAcquire and Use material for baby-care productsproducts No. ofBatch LevelSet up manually controlled machines No. of batches of containSet up computer controlled machines No. of batches of B. ProdProduct LevelDesign and manufacture moulds No.of moulds requiredUse manually controlled machines Product type (containers)Use conputer controlled machines Product type (B.ProductsCustomer LevelConsult customers No. of consultationsProvide warehousing for customers No. of cubit feetFaciltiy LevelManage workers Salaries www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  21. 21. Activities Drivers Activity Cost Activity Volume Activity Rate Unit Level Acquire and Use material for containers No. of Containers 40,000 1,000,000 0.04Acquire and Use material for baby-care products No. of products 80,000 8,000 10Batch Level Set up manually controlled machines No. of batches of containers 3,000 10 300 Set up computer controlled machines No. of batches of B. Produst 12,000 20 600Product Level Design and manufacture moulds No.of moulds required 5,000 5 1000 Use manually controlled machines Product type (containers) 15,000 1 15000 Use conputer controlled machines Product type (B.Products) 40,000 1 40000Customer Level Consult customers No. of consultations 4,000 40 100 Provide warehousing for customers No. of cubit feet 2,000 10,000 0.2Faciltiy Level Manage workers Salaries 3,000 15,000 0.2 Use main building Square feet 48,000 16,000 3 www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  22. 22. Ascertaining Cost Activities A. Rate A.Volume Containers Baby Product Unit Level Acquire and Use material for containers 0.04 1,200,000 48,000Acquire and Use material for baby-care products 10 7,000 70000Batch Level Set up manually controlled machines 300 12 3,600 Set up computer controlled machines 600 16 9600Product Level Design and manufacture moulds 1000 1 1,000 4 4000 Use manually controlled machines 15000 1 15,000 Use conputer controlled machines 40000 1 40000Customer Level Consult customers 100 Containers 2 200 B.products 40 4000 Provide warehousing for customers 0.2 Containers 8,000 1,600 B.products 2,000 400Faciltiy Level Manage workers 0.2 Containers 4,000 800 B.products 10,000 2000 Use main building 3 Containers 5,000 15,000 B.products 7,000 21000Total Cost 85,200 151,000 www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  23. 23. Building an ABC Model Identify Identify Identify Resources Activities Cost Objects Define Define Activity Resource Drivers Drivers Enter Enter Enter CalculateResource Resource Activity Costs Costs Driver Qty. Driver Qty. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  24. 24. ActivityAny event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  25. 25. Activity Cost PoolThe overhead cost allocated to a distinct type of activity or related activities. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  26. 26. Illustration 4-2Activities and Related Cost Drivers www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  27. 27. Reasoning for ABC www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  28. 28. Cost DriverAny factor or activity that has a direct cause-effect relationship with the resources consumed.In ABC cost drivers are used to assign activity cost pools to products or services. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  29. 29. Illustration 4-3www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  30. 30. Activity-Based Costing (ABC)Calculate unit cost• Identify activities• Identify cost driver• Compute overhead rate• Assign overhead costs www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  31. 31. Benefits of Activity-Based CostingMore accurate product costingwhich necessitates: éMore cost pools used to assign overhead éEnhanced control over overhead éBetter management decisions www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  32. 32. Limitations of Activity-Based Costing éCan be expensive to use. éSome arbitrary allocations continue. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  33. 33. Activity-Based Management• Natural extension of ABC – Why are activities performed? • Are they necessary? • Are they consistent with organizational goals? – How are they performed? • Are they performed efficiently? • Can they be redesigned or eliminated? www.nimbusconsulting.net, Email:33 info@nimbusconsulting.net
  34. 34. “You Get What You Measure” www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  35. 35. ABM for Process Improvement• Focus on problems, opportunities• Prioritize opportunities for improvement – Most critical – Greatest potential for cost savings www.nimbusconsulting.net, Email:35 info@nimbusconsulting.net
  36. 36. ABM for Process Improvement• Determine and explain causes for problems and opportunities – Cannot improve the system without first understanding it• Select specific improvement projects www.nimbusconsulting.net, Email:36 info@nimbusconsulting.net
  37. 37. ABM for Process Improvement• Use ABC/ABM data to test potential impact of changes• Make changes• Iterate – Process of continual improvement www.nimbusconsulting.net, Email:37 info@nimbusconsulting.net
  38. 38. Implications of ABC/ABM• Shifts focus from managing costs to managing activities• Aids in recognizing, measuring and controlling complexity• Promotes understanding of why costs are incurred• Provides better cost allocation information www.nimbusconsulting.net, Email:38 info@nimbusconsulting.net
  39. 39. Implications of ABC/ABM• Useful for planning future operations• Fosters continuous improvement• Likely to meet with substantial resistance – Analysis of why and how activities are performed www.nimbusconsulting.net, Email:39 info@nimbusconsulting.net
  40. 40. Thank YouNandan S. BishtDirector: Nimbus Consulting Pvt. Ltd.nandan@nimbusconsulting.netwww.nimbusconsulting.net, www.nimbusconsulting.net, Email: info@nimbusconsulting.net 40
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