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# Activity base costing.pptx presentation

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• Cost object:A cost object is a tangible input for a product manufactured/Service provided, like labor or material. For example a cloth manufacturing firm requires some amount of predetermined labor and predetermined raw material for any amount of cloth being manufactured.
• Unit level cost :For example, fabric and thread are unit-level costs for an apparel manufacturer: if the company wants to double production, it will need twice as much fabric and thread. Facility level cost : . An example is property taxes on the facility, or the salaries of front office personnel such as the receptionist and office managerProduct level cost :An example is the salary of a product manager with responsibility for only one product. The product manager’s salary is a fixed cost to the company for a wide range of production volume levels. However, if the company drops the product entirely, the product manager is no longer needed.
• Stage-1 For example, say that the overall cost of resetting a machine for production during the year was Rs 1 million. You have two products and you had to switch the machine over 100 times. The first stage of allocation would stipulate that the cost of one setting switch is Rs-10,000.Stage-2Using the same example, a uniform batch of each product would be produced after every switch. So after every switch, 1,000 units of Product A or 10,000 units of Product B would be produced. The “switching cost” allocated to a single item of Product A would be Rs-10, while the switching cost for a single item of Product B would be Rs-1.
• An ABC system allocates indirect costs based on a product’s cost driver, or the factor that creates the cost. As costs are allocated per product, a picture starts to emerge of which business processes are performing well and which ones need to be improvedThe use of ABC can also add value to the continuous improvement of business processes.The ABC method accounts for costs similar to the way production work is performed, allowing your business to better understand where overhead costs are going. The data can identify wasteful products and unnecessary costs, so that resources can be used productively
• Setting up an ABC system can be expensive and time-consuming. As business activities are analyzed, they must be broken down into each activity’s individual components. The entire process can use up valuable resources , ABC does not conform to accounting standards and should not be used for external reporting. Since traditional cost figures tend to be the norm, interpreting ABC data along with regular accounting information can be confusing and lead to bad decision-making.
• ### Activity base costing.pptx presentation

1. 1. 5/14/2014
2. 2. COST ACCOUNTING (ABC)
3. 3. Definition ABC is an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. CIMA (Chartered Institute of Management Accountants) 5/14/20143
4. 4.  Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods.  The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today  However, from the 1960s - particularly 1980s - this changed rapidly and ABC emerge. 4Cost accounting Sir Abdul Razaq
5. 5. ABC HIERARCHY ACTIVITY BASE COST UNIT- LEVEL COSTS BATCH- LEVEL COSTS: PRODUCT- LEVEL COSTS: FACILITY- LEVEL COSTS:
6. 6. ABC Hierarchy Unit-level costs: Unit level cost is the basic material cost if we need more production we have to use more material and vise versa. Batch-level costs: Machine setup costs are often batch-level costs. The time required to prepare a machine to run one batch of product is usually independent of the number of units in the batch: the same time is required to prepare the machine to run a batch of 100 units as a batch of 50 units Product-level costs: These costs are usually fixed and direct with respect to a given product Facility-level costs: These costs are usually fixed and direct with respect to the facility 6
7. 7. TRADITIONAL V/S ACTIVITY BASE COSTING 7
8. 8. * ABC approach 1. Presence of case and effect relationship between cost allocation basis and indirect pools 2. Rational basis of assigning indirect costs to various activities 3. Improved decision making such as fixing selling price and pinpointing the area where cost reduction is possible Traditional approach 1) Lack of cause and effect relationship between cost allocation basis and indirect costs pool 2) Uses a few pools of indirect costs resulting in over costing or under costing of products 3) Wrong pricing decisions result in loss of market share
9. 9. Traditional V/S ABC 5/14/2014Footer Text 9 Particular With ABC Without ABC Mfg. O/H cost assign to setups \$200,000 \$0 No of setups 400 N/A Mfg. O/H cost per setup \$500 \$0 Total manufacturing O/H cost \$2,000,000 \$2,000,000 Less : cost trace to machine setups 200,000 0 Mfg. O/H cost allocated on M/H \$1,800,000 \$2,000,000 Machine hours 100,000 100,000 Mfg. O/h cost per M/H \$18 \$20 Mfg. o/H cost allocations \$500 setup cost/batch +\$18 per M/H \$20 per M/H
10. 10. Traditional V/S ABC Particulars WITH ABC WITHOUT ABC Mfg. o/h for setting up machine \$500 \$0 No of units batch 5000 N/A Mfg. O/H caused by setup per unit \$0.10 N/A Mfg. O/H cost per machine hour \$18 \$20 No of units produced per machine hour 50 50 Mfg. O/H caused by production. Per unit \$0.36 \$0.40 Total Mfg. O/H Allocated. Per unit \$0.46 \$0.40
11. 11. Particular ABC Without ABC Mfg. O/H cost assigned to setup \$200,000 \$0 No of setup 400 N/A Mfg. O/H cost per setup \$500 \$0 Mfg. O/H cost caused by procurement/handling \$300,000 \$0 Pound of material in products \$3,000,000 N/A Mfg. O/H per pound of product material \$0.10 \$0 Mfg. O/H cost by producing items: Total mfg. O/H cost \$2,000,000 \$2,000,000 Less: cost trace to machine setup -200,000 0 Less: cost traced to procurement/handling -300,000 0 Mfg. O/H cost allocated per M/H \$1500,000 \$2,000,000 Machine hours (M/H) 100,000 100,000 Mfg. O/h cost allocated per M/H \$15 \$20 Mfg. O/H cost allocation \$500 setup cost .batch +\$0.10lb.+ \$15 per MH \$20 per M/H
12. 12. Traditional V/S ABC 5/14/2014 Footer Text 12 Particular ABC(1) ABC(2) NOABC (3) Mfg. O/H for setting up machine \$500 \$500 \$0 No of units in batch 50,000 50,000 N/A Mfg. O/H cost by setup units \$0.01 \$0.01 N/A Mfg. O/H cost per lb. of product \$0.10 \$0.10 N/A Lbs. of material in product 0.5 1.5 N/A Mfg. O/H caused by weight per units \$0.05 \$0.15 N/A Mfg. O/H cost per M/H \$15 \$15 \$20 No of units produced per M/H 50 50 50 Mfg. O/H caused by production per units \$0.30 \$0.30 \$0.40 Total O/H allocated per unit \$0.36 \$0.46 \$0.40
13. 13. Stages of ABC Stage 1: Allocation to Activities The first step in Activity-Based Costing is to divide the expenses of certain overhead activities to a per-event cost. Stage 2: Allocation to Production The second step in activity-based costing is to allocate the activity cost to each product.
14. 14. ABC process
15. 15. Cost pools
16. 16. CHARACTERISTICS  Activity based: The ABC system is based on activities. Activities consist of different functions that are associated with cost objects.  Activity cost center: This is also called cost pool—the overhead cost is identified to an activity and assigned to each activity cost center.  Use of cost drivers: The causes of occurrence of overheads are called cost drivers. These are used to assign costs to products.  Accumulation of overhead costs: Accumulation of overheads is done on the basis of various activities. A single unit—the entire organization—is not taken into account. No blanket rate is applied.  Traceability: Overhead costs can be traced easily. Hence, cost data are more reliable and accurate. ABC
17. 17.   Identifies Wasteful Products  Improves Business Processes  Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions  Enables improved product and customer profitability analysis  It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. Advantages
18. 18. Disadvantages •Misinterpretation of Data •Expensive Implementation •Substantial resources required to implement and maintain. •Does not conform to GAAP. Two costing systems may be needed
19. 19.  http://classes.bus.oregonstate.edu/spring- 07/ba422/Management%20Accounting%20Chapter%2011.htm  http://www.emblemsvag.com/abc.htm Cost accounting Presented to sir Abdul Razaq
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