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  • Activity based accountingActivity-Based /TraditionalSteps of ABCCost PoolsCost DriversLimitations/Benefits of ABCValue-AddedABC-Service Ind.Just-In-TimeHierarchy LevelsPrevious Next Slide Slide S EL End Show 4-1
  • Activity-Based /Traditional Activity-Based CostingSteps of ABCCost PoolsCost DriversLimitations/Benefits of ABCValue-AddedABC-Service Ind.Just-In-TimeHierarchy LevelsPrevious Next Slide Slide End Show 4-2
  • Costing Products...Activity-Based /TraditionalSteps of ABC Direct materials and directCost Pools labor costs are easy to traceCost DriversLimitations/Benefits of ABC Overhead cannot be tracedValue-Added easily and must be assignedABC-Service Ind.Just-In-Time with estimatesHierarchy LevelsPrevious Next Slide Slide End Show 4-3
  • Activity-Based Costing (ABC)Activity-Based /TraditionalSteps of ABC An overhead cost allocationCost Pools system that allocates overheadCost DriversLimitations/ to multiple activity cost poolsBenefits of ABCValue-Added and assigns the activity costABC-Service Ind.Just-In-Time pools to products or servicesHierarchy Levels by means of cost drivers that represent the activities used.Previous Next Slide Slide End Show 4-4
  • ActivityActivity-Based /TraditionalSteps of ABC Any event, action, transaction,Cost Pools or work sequence that causes aCost DriversLimitations/ cost to be incurred inBenefits of ABCValue-Added producing a product orABC-Service Ind.Just-In-Time providing a service.Hierarchy LevelsPrevious Next Slide Slide End Show 4-5
  • Illustration 4-2Activities and Related Cost Drivers
  • Reasoning for ABCActivity-Based /TraditionalSteps of ABCCost PoolsCost DriversLimitations/Benefits of ABCValue-AddedABC-Service Ind.Just-In-TimeHierarchy LevelsPrevious Next Slide Slide End Show 4-7
  • Activity driversActivity-Based /TraditionalSteps of ABC • The linkage between activities andCost PoolsCost Drivers cost objects, such as products,Limitations/ customers,, is accomplished by usingBenefits of ABC activity drivers.Value-AddedABC-Service Ind. • An activity driver is a quantitativeJust-In-Time measure of the output of an activity.Hierarchy LevelsPrevious Next Slide Slide End Show 4-8
  • Activities Drivers Unit Level Acquire and Use material for containers No. of ContainersActivity-Based / Acquire and Use material for baby-care productsproducts No. ofTraditionalSteps of ABC Batch LevelCost Pools Set up manually controlled machines No. of batches of containeCost Drivers Set up computer controlled machines No. of batches of B. ProdLimitations/Benefits of ABC Product Level Design and manufacture moulds No.of moulds requiredValue-Added Use manually controlled machines Product type (containers)ABC-Service Ind. Use conputer controlled machines Product type (B.ProductsJust-In-TimeHierarchy Levels Customer Level Consult customers No. of consultations Provide warehousing for customers No. of cubit feetPrevious Next Slide Slide Faciltiy Level End Show Manage workers Salaries 4-9
  • Illustration 4-3
  • Activity-Based Costing (ABC)Activity-Based /TraditionalSteps of ABC Calculate unit costCost PoolsCost Drivers • Identify activitiesLimitations/Benefits of ABC • Identify cost driver • Compute overhead rateValue-AddedABC-Service Ind. • Assign overhead costsJust-In-TimeHierarchy LevelsPrevious Next Slide Slide End Show 4 - 11
  • Benefits of Activity-Based CostingActivity-Based /Traditional More accurate product costingSteps of ABCCost Pools which necessitates:Cost DriversLimitations/ More cost pools used toBenefits of ABCValue-Added assign overheadABC-Service Ind.Just-In-Time Enhanced control overHierarchy Levels overheadPrevious Slide Next Slide Better management End Show decisions 4 - 12
  • Limitations of Activity-Based CostingActivity-Based /Traditional Can be expensive to use.Steps of ABCCost PoolsCost Drivers Some arbitrary allocationsLimitations/ continue.Benefits of ABCValue-AddedABC-Service Ind.Just-In-TimeHierarchy LevelsPrevious Next Slide Slide End Show 4 - 13
  • Switch to ABC when...Activity-Based /Traditional Products differ greatly in volume andSteps of ABC manufacturing complexityCost Pools Products lines areCost Drivers numerousLimitations/ diverseBenefits of ABC require differing degrees of supportValue-Added servicesABC-Service Ind. Overhead costs constitute a significantJust-In-Time portion of total costsHierarchy Levels The manufacturing process or number of products has changed significantly Production or marketing managers arePrevious Slide Next Slide ignoring data provided existing system End Show 4 - 14
  • Activity-Based ManagementActivity-Based /TraditionalSteps of ABC An extension of ABC from aCost Pools product costing system to aCost DriversLimitations/ management function thatBenefits of ABCValue-Added focuses on reducing costs andABC-Service Ind.Just-In-Time improving processes andHierarchy Levels decision making.Previous Next Slide Slide End Show 4 - 15
  • Value-Added ActivitiesActivity-Based /Traditional An activity that increases the worth ofSteps of ABCCost Pools a product or service such as...Cost Drivers engineering designLimitations/Benefits of ABC machine set-upsValue-AddedABC-Service Ind. machiningJust-In-Time assemblingHierarchy Levels paintingPrevious Next packaging Slide Slide End Show 4 - 16
  • Nonvalue-Added ActivityActivity-Based /Traditional An activity that adds cost to, orSteps of ABCCost Pools increases the time spent on, aCost Drivers product/service without increasingLimitations/ its market value such as:Benefits of ABCValue-Added Repair of machinesABC-Service Ind. Storage of inventoryJust-In-Time Moving of materialsHierarchy Levels Building maintenance InspectionsPrevious Next Slide Slide Inventory Control End Show 4 - 17