The document discusses Activity-Based Costing (ABC), including what it is, how it allocates direct and indirect costs, and provides an example of calculating costs using ABC. Specifically: - ABC identifies activities in an organization and assigns costs to products/services based on consumption of activities. It allocates both direct and indirect costs. - Indirect costs are allocated based on activities like purchasing, design, production, sales, and customer service. - The example shows calculating overhead costs allocated to a product based on cost pools and drivers like material costs, design hours, production runs, and machine hours. - ABC provides more accurate product costing through better cost allocation and can lead to improved management decisions

1. 5

2. Group Members:
Ibrar Hussain 13007058057
Zeeshan Shoukat 13007058040
Muhammad Faisal 13007058056

4. Present to our respected teacher
“Miss Farrah Yasir”

5. What is ABC
• Activity-based costing (ABC) is
a costing methodology that identifies
activities in an organization and assigns
the cost of each activity with resources to
all products and services according to the
actual consumption by each.

6. Cont….
• It allocates direct and indirect costs to products and services
based on the level of activities used to create and deliver those
products and services.
• Activities such as:
purchasing, design, production, sales, marketing and
customer service are utilized by different products and services (cost
objects) based on their complexity and business requirements.

7. Direct & indirect material?
• Direct costs: A cost that can be directly traced to producing
specific goods or services., e.g., salaries for project staff and
materials required for a particular project.
• Indirect costs: are costs that are not directly accountable to a cost
object (such as a particular function or product). Indirect costs may
be either fixed or variable. Indirect costs include taxes,
administration, personnel and security costs, and are also known
as overhead.

8. Next presenter

9. Activity-Based Costing System 9
Product
(A,B,C,D,…,N)
Cost Pools
(I,II,III,IV,V….,N)
Cost Drivers
(1,2,3,4,…N)

10. Activity-Based Costing System 10
No. of
Setup
Hours
Product A Product B Product C
Cost
Allocation
Base
Cost
Objects
No. of
Shipments
No. of
employees
SetupDesign ShippingActivity
Overheads Cost
Pool
D e p a r t m e n t s

11. Activity-Based Costing System 11
Activity Cost Pools Activity Cost Drivers
 Production
a) Number of units
b) Number of set-ups
c) Number electricity units consumed
 Marketing
a) Number of sales personnel
b) Number of sales orders
 Research & Development
a) Number of research projects
b) Personnel hours spend on projects
c) Technical complexities of the projects
 Customer Service
a) Number of service calls
b) Number of products serviced
c) Hours spend on servicing products
 Purchasing a) Number of purchase orders
 Material Handling a) Number of material requisitions

12. Question:-
• Unit 5000
• Direct labor hours: 21 hours
• Raw material cost: 20,000
• Hours in design department 5 hours
• Production runs 1 runs
• Machine hours 12 hours
Activity cost pool Overhead cost Cost driver Budget level for cost driver
Purchasing, storage and material
handling
Rs. 400,000 Raw material costs 2,000,000
Engineering and product design 200,000 Hours in design department 10,000 hours
Machine setup costs 140,000 Production runs 2,000 runs
Machine depereciation and
maintenance
600,000 Machine hours 200,000 hours
Factory depreciation, taxes, insurance
and utilitis
400,000 Machine hours 200,000 hours
Other manufacturing overhead
costs
300,000 Machine hours 200,000 hours
2040,000

13. Solution:
a) Pool rates:-
Rs. 0.2 per R/M cost (Rs.400000/2000000)
Rs. 20 per design dep. Hrs. (Rs. 200000/10,000 hrs)
Rs. 70 per Prod. Runs (Rs. 140000/2000 runs)
Rs. 3 per machine Hrs (Rs. 600000/200000)
Rs. 2 per machine Hrs (Rs. 400000/200000)
Rs. 1.5 per machine Hrs (Rs. 300000/200000)
b) Overhead cost:-
Rs. 0.2*Rs. 20,000 =Rs. 4000
Rs. 20*5 hrs. =Rs. 100
Rs. 70*1 run =Rs. 70
Rs. 3* 12 hrs. =Rs. 36
Rs. 2* 12 hrs. =Rs. 24
Rs. 1.5* 12 hrs. =Rs.18
Total FOH Rs. 4248
c)Overhead cost per Box=
4248
5000
= Rs. 0.8496 per box
d) POHR=
𝐵𝑢𝑑𝑔𝑡𝑒𝑑 𝐹𝑂𝐻
𝐵𝑢𝑑𝑔𝑡𝑒𝑑
𝐷
𝐿
ℎ𝑟𝑠
=
2040000
8000
Rs. 255 per D/L hrs
e) FOH = Rs. 255*21 D/L hrs =Rs.5355
f) Rs. 5355/5000 = Rs. 1.071 per box

14. next presenter

15. Advantages
More accurate product costing through:
• More accurate information leads to better decision
• Enhanced control over overhead costs
• Better management decisions
• Managers are more likely to focus on improving Efficiency in the
most costly activities to reducing of cost .

16. Dis- Advantages
• ABC Costly to implement
• Companies are very large by the activities maintain ABC system
very difficult
• Require time to employee to check the activities daily