Activity Based Costing and Zero Based Budgeting - Optimise-GB

Zero Based Budgeting (ZBB) & Activity Based Costing (ABC) simple as 123... Optimise- GB

Benefits of using ABC and ZBB together
Budgeted costs are reduced by removing previously assumed expense
It challenges managers to re-think their budgeted costs, rather than adding incremental spend from previous years
It focuses managers on the business Input, Process and Output. This drives a better understanding of how the business works and what the true costs are for those activities
Optimise -GB

ZBB:
Budgeting that works from the “ground up” and does not assume that costs from last year will exist this year. The budget therefore starts at £0.
Every activity / department is reviewed comprehensively and all expenditures must be approved before including them in the budget
Optimise -GB

ABC :
Is used to identify the true cost of an activity including the costs for internal and external resources, space utilisation and power costs for the business premises
Is used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives
Optimise -GB

Using ABC with ZBB
ABC provokes thought to identify what needs to be in the budget by looking at:
Inputs (labour, machines, premises etc)
Process (manufacturing, administration, display units etc) to generate
Outputs (sale of goods or services)
ZBB starts the budget process with a blank page Optimise -GB

Where do you start?
Segment your products / services into defined groups
Prepare a sales forecast for each group
Example PC Store sales forecast
Now you know your volumes, you are able
to calculate your costs
Optimise- GB PC Sales January February March Q1 Revenue £30,000 £90,000 £120,000 £240,000 Volume 120 360 480 960 Price / Unit £250 £250 £250 £250

Cost elements Fixed Costs Variable Costs £0 £10K £20K £30K £40K £50K
Variable costs move in line with sales, for instance the cost of buying products will vary based on sales activity
Fixed costs remain constant irrespective of sales levels, for example the cost of rent for a shop will not change based on sales activity
Optimise -GB

What are the types of costs that need to be considered? Optimise -GB

Variable costs
Variable costs will vary depending on the number of sales. For example:
If you sell 20 PC’s, you need to buy 20 PC’s from your supplier
If your store doubles its sales, you will need to recruit more shop assistants
Optimise -GB

Calculating variable costs
Each PC costs £120
1 sales assistant can sell 150 units per month
Each sales assistant will cost £1,500 per month
Optimise -GB PC Sales January February March Q1 Revenue £30,000 £90,000 £120,000 £240,000 Volume 120 360 480 960 Sales Price / Unit £250 £250 £250 £250 No. Staff 1 3 4 Staff costs £1,500 £3,000 £4,500 £9,500 PC costs £14,400 £43,200 £57,600 £115,200

Calculating variable costs - Administration costs Through ABC and ZBB you identify the required activities and assign costs In other budgeting techniques you would roll the costs forward incrementally based on previous trends however this is not best practice Optimise -GB January February March Q1 Book keeping £500 £500 £500 £1,500 Marketing £1,000 £500 £0 £1,500 Stationery £250 £150 £100 £500 Admin costs £1,750 £1,150 £600 £3,500

Fixed costs Fixed costs are not linear to sales volumes. For instance the monthly rent of £30,000 will not change if sales double from the previous month. It may be argued that power is variable, but this is only true for manufacturing companies that utilise a substantial amount of power for their machines to function. Optimise -GB

Calculating Fixed costs
Power is £1,000 per month
Rent is £10,000 per month
You are now ready to pull together the budgets based on ZBB and ABC
Optimise -GB PC Sales January February March Q1 Power £1,000 £1,000 £1,000 £3,000 Rent £10,000 £10,000 £10,000 £30,000

Forming the Budget Through ABC and ZBB Optimise- GB January February March Q1 Revenue £30,000 £90,000 £120,000 £240,000 Staff costs £1,500 £3,000 £4,500 £9,500 PC costs £14,400 £43,200 £57,600 £115,200 Admin costs £1,750 £1,150 £600 £3,500 Power £1,000 £1,000 £1,000 £3,000 Rent £10,000 £10,000 £10,000 £30,000 Total Costs £28,650 £58,350 £73,700 £160,700 Profit £1,350 £31,650 £46,300 £79,300

You should now be able to create budgets using ABC and ZBB that reflect your business plans accurately Optimise- GB

For other solutions
contact
Simon Misiewicz
Web: www.optimise-gb.com
Email: [email_address]
or through
Optimise- GB

Activity Based Costing and Zero Based Budgeting - Optimise-GB

by Simon Misiewicz

Accessibility

Categories

Upload Details

Usage Rights

Statistics

Activity Based Costing and Zero Based Budgeting - Optimise-GB Presentation Transcript