The document discusses Activity Based Costing (ABC), an approach for assigning overhead costs to products and services. It notes that traditional costing methods can misallocate overhead, affecting management decisions. ABC addresses this by tracing overhead costs to the activities that cause those costs, and then assigning the costs of each activity to products based on their use of that activity. This provides a more accurate picture of product costs. The document outlines the basic concepts and steps of implementing ABC, including identifying activities, assigning resource costs to activities, defining activity cost drivers, and calculating activity costs to allocate to cost objects like products.
Few people would start a journey with a map that shows neither where they are nor where they are going. Yet many companies seek to compete without knowing the true cost, and profit, of their products or services, and customers.
Directors often base corporate strategy on misleading information that supports bad decisions. This only helps competitors. Traditional financial information systems measure a company’s performance only in the aggregate.
They may not help to find opportunities to increase competitiveness in the market place.
To create more value and enhance their profitability, organisations in manufacturing and service require accurate information on costs. Activity Based Costing (ABC) can provide it. But organising an effective ABC initiative is not as simple as opening a book and beginning at Chapter One.
Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into direct costs.
In this way an organization can precisely estimate the cost of its individual products and services for the purposes of identifying and eliminating those which are unprofitable and lowering the prices of those which are overpriced.
Few people would start a journey with a map that shows neither where they are nor where they are going. Yet many companies seek to compete without knowing the true cost, and profit, of their products or services, and customers.
Directors often base corporate strategy on misleading information that supports bad decisions. This only helps competitors. Traditional financial information systems measure a company’s performance only in the aggregate.
They may not help to find opportunities to increase competitiveness in the market place.
To create more value and enhance their profitability, organisations in manufacturing and service require accurate information on costs. Activity Based Costing (ABC) can provide it. But organising an effective ABC initiative is not as simple as opening a book and beginning at Chapter One.
Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into direct costs.
In this way an organization can precisely estimate the cost of its individual products and services for the purposes of identifying and eliminating those which are unprofitable and lowering the prices of those which are overpriced.
Activity Based Costing: A Case of Plastim CorporationRahul Dhiman
Activity Based Costing: A Case of Plastim Corporation. This case is about comparison between the Modern Costing system is better than The Traditional System.
Activity based costing is considered to be useful only for Manufacturing Organizations whereas reality is that it is equally usefull to Service providers
Собрание схем по методологии калькулирования себестоимости - Activity-Based Costing. Также есть схемы по Activity-Based Budgeting. Схемы собраны в одну презентацию. Надеюсь, что поможет Вам мои подборки. Мой сайт: ivan-shamaev.ru
Activity Based Costing: A Case of Plastim CorporationRahul Dhiman
Activity Based Costing: A Case of Plastim Corporation. This case is about comparison between the Modern Costing system is better than The Traditional System.
Activity based costing is considered to be useful only for Manufacturing Organizations whereas reality is that it is equally usefull to Service providers
Собрание схем по методологии калькулирования себестоимости - Activity-Based Costing. Также есть схемы по Activity-Based Budgeting. Схемы собраны в одну презентацию. Надеюсь, что поможет Вам мои подборки. Мой сайт: ivan-shamaev.ru
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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.
Cost ManagementLecture 24Chapter 10 Modified from P.docxfaithxdunce63732
Cost Management
Lecture 24
Chapter 10
* Modified from PPT slides of McGraw-Hill/Irwin
Activities
consume
resources Products
consume
activities
Recap of what we covered last class
Costing method that first assigns costs to
activities and then allocate them to products
based on the products’ consumption of
activities.
Activity-Based Costing
Activity-Based Cost Management
Activity-based cost
management uses activity
analysis in decision making.
Activity-based costing
focuses on activities in
allocating overhead
costs to products.
Activity-based
management focuses
on managing activities
to reduce costs.
Overview:
1. Explain the concept of activity-based cost management.
2. Use activity-based costing methods to assess customer and
supplier costs.
3. Distinguish between resources used and resources supplied.
4. Design cost management systems to assign capacity costs.
5. Describe how activities that influence quality affect costs and
profitability.
Managing the Cost of Customers and Supplies
Resources cost Customers (and suppliers)
use resources
Some customers use more
resources than others
Time Money=
Activities consume
resources
Services consume
activities
ABC and the Cost: Customers and Suppliers
Use the same four-step ABC product costing process to
assess customers and suppliers.
3. Compute a cost rate per cost driver unit or
transaction.
4. Allocate costs to customers by multiplying the
cost driver rate by the volume of cost driver units
consumed by the activity or transaction that
occurred.
1. Identify the activities that consume resources and
assign costs to them.
2. Identify the cost driver(s) associated with each
activity.
Example: Cost of Customers
Operating Data
Red’s Lumber
Jack Jill Firm
Sales 50,000$ 50,000$ 5,000,000$
Cost of goods (@60%) 30,000 30,000 3,000,000
Gross margin 20,000 20,000 2,000,000
Order/Delivery Charges (@16%) 8,000 8,000 800,000
Delivery costs 800,000
Other operating costs 1,435,000
Operating profit 565,000$
All customers pay a 16% delivery charge
Example: Red’s Lumber – Step 1
What activities consume resources
for Red’s delivering service?
Process Flow of the Delivery Service
Red’s Lumber
Entering
Order
Loading
Order
Delivering
Order
Identify the activitiesStep 1
Example: Red’s Lumber – Step 2
Identify the cost drivers and the
expected volume of each cost driver.Step 2
Entering order Number of orders entered
Loading order Number of items loaded
Delivering order Number of deliveries made
Delivery administration Order value
Activity Cost Driver
Example: Red’s Lumber – Step 2
Identify the cost drivers and the
expected volume of each cost driver.Step 2
Entering order Number of orders entered
Loading order Number of items loaded
Delivering order Number of deliveries made
Delivery administration Order value.
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Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
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While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. In the past, overhead costs were relatively small, and
the problems arising from inappropriate overhead
allocations were not so significant
But nowadays, factories are highly automated, resulting
in increasing depreciation charges, maintenance cost
and machinery set-up cost
Errors in overhead absorption may seriously affect the
management decisions
2
3.
The Activity-based costing (ABC) system is developed
to provide better approach for assigning overheads to
products and computing product costs.
3
4. Today’s businesses are working in an increasingly
complex environment because of…..
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
5. Direct materials and direct labor costs
are easy to trace
Overhead cannot be traced easily and
must be assigned with estimates
6. Spreads overhead cost over entire
customer base.
Each order “appears” to cost the same.
Orders with high profit margins
subsidize orders with low profit
margins
7. A single or plant wide rate called a
predetermined overhead rate is used:
Job Order = Direct Labor Costs
Process Cost = Machine Hours
8. Amount of direct labor used in
many industries has decreased
Total overhead from depreciation
on equipment, utilities, repairs,
maintenance has increased
11. Basics of A B C
• Cost of a product is the sum of the costs of
all activities required to manufacture and
deliver the product.
• Products do not consume costs directly
• Money is spent on activities
• Activities are consumed by product/services
12. Basics of A B C (contd.)
• ABC assigns Costs to Products by tracing
expenses to “activities”. Each Product is charged
based on the extent to which it used an activity
• The primary objective of ABC is to assign costs
that reflect/mirror the physical dynamics of the
business
13. An overhead cost allocation system that
allocates overhead to multiple activity
cost pools and assigns the activity cost
pools to products or services by means
of cost drivers that represent the
activities used.
14. Any event, action, transaction, or
work sequence that causes a cost to be
incurred in producing a product or
providing a service.
15. The overhead cost allocated to a
distinct type of activity or related
activities.
16.
17. Any
factor or activity that has a direct
cause-effect relationship with the
resources consumed.
In ABC cost drivers are used to assign
activity cost pools to products or services.
19. Steps in ABC Costing
Cost pools are groups
or categories of
individual expense
items
Steps:
1. Form cost pools
2. Identify activities
3. Map resource costs to activities
4. Define activity cost drivers
5. Calculate cost
20. In developing an ABC system, the organization
identifies the activities being performed:
Activity Dictionary
•Move material
•Respond to customers
•Schedule production
•Purchase material
•Inspect items
•Improve products
•Introduce new products
•Explore new markets
21.
Financial accounting categorises expenses by
spending code; salaries, fringe benefits, utilities,
travel, communication, computing, depreciation etc.
•ABC collects expenses from this financial
system and drive them to the activities
performed.
22. Mapping
Accounting Records
Salaries
313,000
Activities
Business Development
ABC Records
Salaries Depreciationlectricity Supplies Travel
E
20,000
25000
5000
Total
5000 55,000
Depreciation
155,000
Maintianing Present Business 80,000
60000
50000
5000
10000 205,000
Electricity
132,000
Purhcasing Material
125,000
50000
20000
20000
60000 275,000
Supplies
25,000
Set up Machines
25,000
10000
2000
37,000
Travel
100,000
Running Machines
50,000
10000
50000
110,000
Total
725,000
Resolve Quality Problems
13,000
5000
25000 43,000
Total
313,000 155000 132000
25000 100000 725,000
23. Activities: Types
• Unit level: Performed each time a unit is
produced
• Batch level: Performed each time a batch is
produced
• Product level: Performed to support production
of different type of product
• Facility level :Residuary head
24. I.
Unit-level activities
The costs of direct materials, direct labor, and machine maintenance are
examples of unit-level activities.
I.
Batch-level activities
are costs incurred every time a group (batch) of units is produced . Purchase
orders, machine setup, and quality tests are examples of batch-level activities.
I.
Product-line activities
Examples of product-line activities are engineering changes made in the
assembly line, product design changes, and warehousing and storage costs for
each product line.
I.
Facility support activities
The costs relating to the activities are administrative in nature and include
building depreciation, property taxes, plant security, insurance, accounting,
outside landscape and maintenance, and plant management's and support staff's
salaries.
25. The linkage between activities and cost objects, such
as products, customers,, is accomplished by using
activity drivers.
An activity driver is a quantitative measure of the
output of an activity.
The selection of an activity driver reflects a
subjective trade-off between accuracy and cost of
measurement.
26. Activitie s
Drive rs
Unit Le ve l
Acquire and Use material f or containers
Acquire and Use material f or baby-care products
No. of Containers
No. of products
Batch Le ve l
Set up manually controlled machines
Set up computer controlled machines
No. of batches of containers
No. of batches of B. Produst
Product Le ve l
Design and manuf acture moulds
Use manually controlled machines
Use conputer controlled machines
No.of moulds required
Product type (containers)
Product type (B.Products)
Cus tom e r Le ve l
Consult customers
Provide w arehousing f or customers
No. of consultations
No. of cubit f eet
Faciltiy Le ve l
Manage w orkers
Salaries
27. Activities
Drivers
Unit Level
Acquire and Use material for containers No. of Containers
Acquire and Use material for baby-care products No. of products
Batch Level
Set up manually controlled machines No. of batches of containers
Set up computer controlled machines No. of batches of B. Produst
Activity Cost Activity Volume
Activity Rate
40,000
80,000
1,000,000
8,000
0.04
10
3,000
12,000
10
20
300
600
5,000
15,000
40,000
5
1
1
1000
15000
40000
4,000
2,000
40
10,000
100
0.2
3,000
48,000
15,000
16,000
0.2
3
Product Level
Design and manufacture moulds No.of moulds required
Use manually controlled machines Product type (containers)
Use conputer controlled machines Product type (B.Products)
Customer Level
Consult customers No. of consultations
Provide warehousing for customers No. of cubit feet
Faciltiy Level
Manage workers Salaries
Use main building Square feet
28. Ascertaining Cost
Activities
A. Rate A.Volume
Containers
Baby Product
Unit Level
Acquire and Use material for containers
0.04
1,200,000
48,000
Acquire and Use material for baby-care products
10
7,000
70000
Batch Level
Set up manually controlled machines
Set up computer controlled machines
300
600
12
16
3,600
1
4
1
1
1,000
9600
Product Level
Design and manufacture moulds
Use manually controlled machines
Use conputer controlled machines
1000
15000
40000
4000
15,000
40000
Customer Level
Consult customers
Containers
B.products
Provide warehousing for customers
Containers
B.products
Faciltiy Level
Manage workers
Containers
B.products
Use main building
Containers
B.products
Total Cost
100
2
40
200
8,000
2,000
1,600
4,000
10,000
800
5,000
7,000
15,000
4000
0.2
400
0.2
2000
3
85,200
21000
151,000
29. More accurate product costing which
necessitates:
More cost pools used to assign
overhead
Enhanced control over overhead
Better management decisions
30. Products differ greatly in volume and manufacturing
complexity
Products lines are
numerous
diverse
require differing degrees of support services
Overhead costs constitute a significant portion of
total costs
The manufacturing process or number of products
has changed significantly
Production or marketing managers are ignoring data
provided existing system
31. An extension of ABC from a
product costing system to a
management function that focuses
on reducing costs and improving
processes and decision making.
32. An activity that increases the worth of a product or
service such as...
engineering design
machine set-ups
machining
assembling
painting
packaging
33. An activity that adds cost to, or increases the time spent on, a
product/service without increasing its market value such as:
Repair of machines
Storage of inventory
Moving of materials
Building maintenance
Inspections
Inventory Control