Activity Based Costing and Zero Based Budgeting - Optimise-GB


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Optimise-GB gives a presentation on Activity Based Costing (ABC) and Zero Based Costing (ZBB). These methods illustrates how ABC and ZBB can be used to calculate unit cots taking into account variable, semi-fixed and fixed costs by splitting the costs by usage, time, space and volume from scratch. This ensures that assumptions are not taken into account and factual costs are applied so that true margins may be derived. Thank you Simon Misiewicz

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  • Congratulations !!!!!! Thank you for all presentations very interesting presentations that I reference in some of our groups
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Activity Based Costing and Zero Based Budgeting - Optimise-GB

  1. 1. Zero Based Budgeting (ZBB) & Activity Based Costing (ABC) simple as 123... Optimise- GB
  2. 2. Benefits of using ABC and ZBB together <ul><li>Budgeted costs are reduced by removing previously assumed expense </li></ul><ul><li>It challenges managers to re-think their budgeted costs, rather than adding incremental spend from previous years </li></ul><ul><li>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 </li></ul>Optimise -GB
  3. 3. <ul><li>ZBB: </li></ul><ul><li>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. </li></ul><ul><li>Every activity / department is reviewed comprehensively and all expenditures must be approved before including them in the budget </li></ul>Optimise -GB
  4. 4. <ul><li>ABC : </li></ul><ul><li>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 </li></ul><ul><li>Is used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives </li></ul>Optimise -GB
  5. 5. Using ABC with ZBB <ul><li>ABC provokes thought to identify what needs to be in the budget by looking at: </li></ul><ul><li>Inputs (labour, machines, premises etc) </li></ul><ul><li>Process (manufacturing, administration, display units etc) to generate </li></ul><ul><li>Outputs (sale of goods or services) </li></ul>ZBB starts the budget process with a blank page Optimise -GB
  6. 6. Where do you start? <ul><li>Segment your products / services into defined groups </li></ul><ul><li>Prepare a sales forecast for each group </li></ul>Example PC Store sales forecast <ul><li>Now you know your volumes, you are able </li></ul><ul><li>to calculate your costs </li></ul>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
  7. 7. Cost elements Fixed Costs Variable Costs £0 £10K £20K £30K £40K £50K <ul><li>Variable costs move in line with sales, for instance the cost of buying products will vary based on sales activity </li></ul><ul><li>Fixed costs remain constant irrespective of sales levels, for example the cost of rent for a shop will not change based on sales activity </li></ul>Optimise -GB
  8. 8. What are the types of costs that need to be considered? Optimise -GB
  9. 9. Variable costs <ul><li>Variable costs will vary depending on the number of sales. For example: </li></ul><ul><li>If you sell 20 PC’s, you need to buy 20 PC’s from your supplier </li></ul><ul><li>If your store doubles its sales, you will need to recruit more shop assistants </li></ul>Optimise -GB
  10. 10. Calculating variable costs <ul><li>Each PC costs £120 </li></ul><ul><li>1 sales assistant can sell 150 units per month </li></ul><ul><li>Each sales assistant will cost £1,500 per month </li></ul>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
  11. 11. 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
  12. 12. 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
  13. 13. Calculating Fixed costs <ul><li>Power is £1,000 per month </li></ul><ul><li>Rent is £10,000 per month </li></ul><ul><li>You are now ready to pull together the budgets based on ZBB and ABC </li></ul>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
  14. 14. 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
  15. 15. You should now be able to create budgets using ABC and ZBB that reflect your business plans accurately Optimise- GB
  16. 16. <ul><ul><li>For other solutions </li></ul></ul><ul><ul><li>contact </li></ul></ul><ul><ul><li>Simon Misiewicz </li></ul></ul><ul><ul><li>Web: </li></ul></ul><ul><ul><li>Email: [email_address] </li></ul></ul><ul><ul><li>or through </li></ul></ul>Optimise- GB