Design of Activity Based Costing in a Small Company

Letter of Transmittal
June 20, 2021
Zobaida Khanam
Assistant Professor
Dept. of Accounting & Information Systems
Faculty of Business Studies
Bangladesh University of Professionals
Mirpur Cantonment, Mirpur, Dhaka - 1216
Subject: Design of Activity Based Costing in a Small Company
Sir,
With humble respect, it is our pleasure to submit this paper in time. We have given our best
shot to collect information, data, and other significant variables for this paper. We have gone
through all the data and tried to make this paper fully decorated with the things we have
learned in this course. We have tried to make this paper informative and interesting. It is our
expectation that this paper will be able to reach the standards of your judgement. Any error or
omission in this report would be blamed on us, and we would apologize profusely.
We, therefore, pray and hope that you would be kind enough accept our term paper and
oblige thereby.
Sincerely yours,
Ashib-Al-Galib (19211007)
Anonna Fariha (19211055)
Kazi TanzeemTousif (19211065)
Jannatul Maua (19211077)
Towkir Ahmed (19211093)
Batch: AIS-4 (2019)
Department of Accounting and Information Systems,
Faculty of Business Studies,
Bangladesh University of Professionals (BUP)
 Acknowledgement
This is a term paper regarding financial Activity based costing of small companies in
Bangladesh. Bangladesh is a developing country and we have so many MSMEs to grow. So
“how an ABC system can be useful for our country and at the same time how it can be not
good for some companies” is in the paper. For this paper we had to go through some
theoretical papers and sources to finish. For covid-19 situation we had to face some problems
as group works requires group discussion and many things. As well as we could not get the
access to primary sources to complete the paper.
Despite all the problems we faced, We express our deep gratitude and sincere thanks to
almighty Allah for providing us enough opportunity and strength to complete this paper in
time.
In performing our term paper, we had to take the help and guideline of some respected
persons, who deserve our greatest gratitude. The completion of this term paper gives us much
Pleasure.
We would like to show our gratitude Assistant Professor Zobaida Khanam mam for giving us
a good guideline for term paper throughout numerous consultations. We would also like to
expand our deepest gratitude to all those who have directly and indirectly guided us in
writing this term paper.
Many people, especially our classmates and team members itself, have made valuable
comment suggestions on this proposal which gave us an inspiration to improve our term
paper. We thank all the people for their help directly and indirectly to complete our term
paper.

Executive Summary
Introduction
Micro Small and medium enterprises (MSMEs) mean independent businesses which employ
less than a given number of employees or whose total investments fall below certain limits.
MSME means the business with the big opportunity.
MSMEs are playing very important role for the economy of Bangladesh. MSMEs are
considered as a vital instrument for new employment generation, poverty alleviation and
rapid industrialization. These enterprises are considered as engines of economic growth and
the prime mover of any economy around the world. All countries are trying hard to develop
entrepreneurs, promote MSMEs and facilitating their graduation into large industries for
rapid industrialization. Economists, development workers, concerned policy makers and
innovators suggest different tools, techniques, methods, and approaches for MSME
development around the world based on size, capacity, and features of the economy. For
example, Japanese “One Village One Product‟ and Chinese “One Region One Industry‟ and
Michel Porter’s Global Village are widely known approaches of MSME development (Ibid).
In the global world, the market is volatile and competitive due to the liberalization of the
economy. MSMEs accelerate the entrepreneurial skills which help the entrepreneurs to adjust
the business with changing market conditions by diversifying economic activities. At the
same time, the MSMEs of Bangladesh are facing many problems. Along with other problems,
financing is the major problem faced by most of the MSMEs in Bangladesh. If the financing
problems had been solved, the MSMEs could have contributed more to the economy. Venture
capital, bank syndication scheme, HRD in financial institutions and in government offices,
training, and development etc. as potential tools of eliminating the constrains of MSMEs
financing. The performance of MSMEs did not fulfil the expectation of the Bangladesh may
be due to the lack of access to institutional financing, lack of consumer base market for
MSMEs products and non-availability of formal MSMEs entrepreneur development
initiatives. Therefore, appropriate policies and government initiatives should be taken along
with ensuring infrastructural enhancement to face the challenges of MSMEs for the further
development of this sector.
MMSMEs are the bloodline of Bangladesh’s economy. They create employment for 7.8
million people directly and provide livelihoods for 31.2 million. The Covid-19 pandemic has
impacted and changed the landscape for all types of MMSMEs in Bangladesh at various
scales. Businesses that are largely dependent on production and distribution are at high risk of
running out of capital.
The problems resulting from the pandemic include but are not limited to the closure of
showrooms, shops and factories, a significant number of workers returning to their hometown
and market demand falling tremendously. As a result, entrepreneurs are failing to pay their
monthly rent, electricity bills, loan instalments and salaries on time. Some micro-business
entrepreneurs are failing to meet the daily needs of their families due to the disruption in their
income. Besides, there is zero output due to the unavailability of raw materials and lack of
scope to sell their outputs.
Since March 2020, more than 90% of online start-up businesses have also been negatively
affected due to the pandemic. Entire MSMEs are struggling under the weight of demand
downturn, labour shortages, and inability to maintain their supply chain processes. However,
while many enterprises faced considerable IT challenges before COVID-19, the current
situation is pushing them to rapidly operate in new ways and IT is being tested as never
before.
The government, private and non-government organizations are all working hard to cope with
COVID-19. At the same time, despite the high risk to MSMEs in Bangladesh, entrepreneurs
are now trying to adapt. Entrepreneurs’ interest in online business and technological skills has
greatly increased.

Activity Based Costing(ABC)

From the beginning of the industrial revolution until the second half of the twentieth century,
most manufacturers produced large amounts of a small number of products, with most cost
stemming from direct costs such as materials and labour. Traditional cost accounting focused
on direct materials and direct labour in product cost and only estimated overhead costs,
ignoring the increasing role of various types of overhead. As industrial capabilities evolved
over the past 75 years, manufacturers were able to produce many types of products, in
varying amounts, each producing a different amount of overhead. Sophisticated machinery
for producing customizable products to order and information systems added even more
overhead. By the 1970s, information and communication technology made it possible to
gather and process more accurate information about the activities that go into producing a
product. In 1971, George Staubus’ book, Activity Costing and Input-Output Accounting
introduced the idea of activity-based costing, which identifies the activities required to
produce a product and assigns cost to each product based on the cost of the activities required
to produce it.
The Consortium for Advanced Management – International further refined this new concept
and formulated the principles of what is now called activity-based costing (ABC) [26]. In the
1990s, Cooper and Kaplin’s Harvard Business Review article called for increased use of
activity-based cost accounting to identify the true costs of processes and products, so that
companies can make sound decisions related to the profitability and expense of the products
they produce. ABC has also been strongly advocated in important articles by Kaplan and
Bruns , Johnson and Kaplan, Drucker, Drury; Johnson, and Ness and Cucuzza.
Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to
related products and services. This accounting method of costing recognizes the relationship
between costs, overhead activities, and manufactured products, assigning indirect costs to
products less arbitrarily than traditional costing methods. Activity-based costing (ABC) is
mostly used in the manufacturing industry since it enhances the reliability of cost data, hence
producing nearly true costs and better classifying the costs incurred by the company during
its production process. In other words, Activity-based costing (ABC) is a method of assigning
overhead and indirect costs—such as salaries and utilities—to products and services. The
ABC system of cost accounting is based on activities, which are considered any event, unit of
work, or task with a specific goal. An activity is a cost driver, such as purchase orders or
machine setups. The cost driver rate, which is the cost pool total divided by cost driver, is
used to calculate the amount of overhead and indirect costs related to a particular activity.
ABC is used to get a better grasp on costs, allowing companies to form a more appropriate
pricing strategy. Activity-based costing benefits the costing process by expanding the number
of cost pools that can be used to analyse overhead costs and by making indirect costs
traceable to certain activities. The ABC calculation is as follows:
 Identify all the activities required to create the product.
 Divide the activities into cost pools, which includes all the individual costs related to
an activity—such as manufacturing. Calculate the total overhead of each cost pool.
 Assign each cost pool activity cost drivers, such as hours or units.
 Calculate the cost driver rate by dividing the total overhead in each cost pool by the
total cost drivers.
 Divide the total overhead of each cost pool by the total cost drivers to get the cost
driver rate.
 Multiply the cost driver rate by the number of cost drivers.
The ABC system of cost accounting is based on activities, which are any events, units of
work, or tasks with a specific goal, such as setting up machines for production, designing
products, distributing finished goods, or operating machines. Activities consume overhead
resources and are considered cost objects.
Under the ABC system, an activity can also be considered as any transaction or event that is a
cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation
base. Examples of cost drivers include machine setups, maintenance requests, consumed
power, purchase orders, quality inspections, or production orders.
There are two categories of activity measures: transaction drivers, which involves counting
how many times an activity occurs, and duration drivers, which measure how long an activity
takes to complete.
Unlike traditional cost measurement systems that depend on volume count, such as machine
hours and/or direct labour hours to allocate indirect or overhead costs to products, the ABC
system classifies five broad levels of activity that are, to a certain extent, unrelated to how
many units are produced. These levels include batch-level activity, unit-level activity,
customer-level activity, organization-sustaining activity, and product-level activity.

Origin of the study

Significance of the study
Objective
Scope of the study
Limitations of the study
No study is beyond any limitations. While doing this research study we had to face some
difficulties. The limitations of the research activities are as follows-
We did not have so much experience for conducting research and preparing the report very
frequently, though we are in learning position. In depth interview some participants were
unenthusiastic to provide enough information. There was no current information related to
Bangladesh on the Website. There was lack of precise information; both primary and
secondary. There was not enough time to analyse the selected issues. Our resources (such as,
human resource, financial resource, etc.) were limited. So, it was hard for us to prepare a
professional report without limited resources.

Literature review
At the end of the 1980s, Activity-Based Costing (ABC) was developed as a more accurate
source of cost information for goods, consumers, services, and processes, overcoming the
limitations of previous methods. ABC was able to highlight the dangerous cross-subsidy
problem produced by traditional full costing by focusing on activities and their absorption
from distinct cost items [ CITATION Dom21 \l 1033 ].
Large, high-profile, multinational corporations receive far more media attention and name
recognition, but as the following data show, small to medium businesses (SMEs) play an
important part in the countries economy, as well as in the economies of free-market countries
across the world. The complexity of ABC, on the other hand, has limited its adoption,
particularly among SMEs with limited financial and human resources. Even if, as
management accounting systems have demonstrated, ABC may be useful to both SMEs and
large businesses when the advantages do not outweigh the expenses. Nonetheless, because of
SMEs' unique prospects and differences from large corporations, adopting the "traditional"
form of ABC would be an excessive "organizational effort" that would risk overlooking the
potential advantages. As a result, approaches capable of selecting data to create such pricing
systems are required, balancing the need for simplicity while adapting to the characteristics.
As a result, techniques capable of selecting data to execute such costing systems must be
developed, balancing the need for simplicity while adapting to the characteristics of SMEs.
[ CITATION Meh21 \l 1033 ]. To save expenses and the impact of having more precise
information on the costs of the firm Second, there has been a shift in corporate cost
structures. Traditional allocation approaches, which are based on overhead absorption rates,
can often offer inaccurate information on product costs when it comes to the bulk of overhead
expenses. In scholarly papers (Drury, 2001), the shortfalls or restrictions were discussed in
great detail (Lucas, 1997). Kaplan and Johnson were the first to criticize the traditional
costing paradigm (1987). [ CITATION Bor21 \l 1033 ] . ABC is most commonly employed in the
manufacturing business since it improves the accuracy of cost data, resulting in almost real
costs and a better classification of the expenses incurred by the company during its
production process. Target costing, product costing, product line profitability analysis,
customer profitability analysis, and service pricing all use this costing approach. Activity-
based costing is used to gain a better understanding of expenses, allowing businesses to
develop a better pricing strategy. The cost pool total divided by the cost driver produces the
cost driver rate, which is the formula for activity-based costing. In activity-based costing, the
cost driver rate is used to calculate the amount of overhead and indirect costs associated with
a certain activity. [ CITATION Wil21 \l 1033 ].

Methodology
Analysis & Discussions
Simplified ABC Model for Small Companies
Small and medium-sized companies are often restrained in their ability to exercise managerial
accounting because they lack the necessary resources. Managerial accounting can be
beneficial to these firms as it is for large corporations when the benefits of managerial
accounting do not outweigh the associated costs.

Pros & Cons of ABC Model for Small Companies

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands
the number of cost pools that can be used to assemble overhead costs. Instead of
accumulating all costs in one company-wide pool, it pools costs by activity.
Second, it creates new bases for assigning overhead costs to items such that costs are
allocated based on the activities that generate costs instead of on volume measures, such as
machine hours or direct labour costs.
Finally, ABC alters the nature of several indirect costs, making costs previously considered
indirect—such as depreciation, utilities, or salaries—traceable to certain activities.
Alternatively, ABC transfers overhead costs from high-volume products to low-volume
products, raising the unit cost of low-volume products.
The main purpose of cost accounting (as opposed to financial accounting) in management is
to provide data for managers. Managers can use cost data to make decisions that will
ultimately improve the company’s financial performance. Many of these decisions relate to
which products to advertise, which to expand, and which to discontinue. Other decisions
attempt to improve operations, lower cost, or allow more competitive pricing. Because all of
these decisions rely heavily on cost accounting data, having accurate data are essential for a
company in identifying sources of profit and maximizing potential profitability

ABC Model for “the Company”

Beck and Nowak (2000) in their diary attempted to blend discrete occasion re-enactment with
ABC to give an improved costing, arranging and determining instrument. In recreation, actual
things course through the succession of producing tasks and in ABC costs course through the
model driven by characterize action drivers. Consequently the blend of these two can be
sorted out as follows:

Resources
Resource Driver

Raw Materials Activities/Events End Products

Activity Driver Final objective of both is the end products.

End Products

Figure 1:
The examination work has shown that the mix of ABC ideas and discrete-occasion recreation
model may get the scope of expected item costs.
one can begin with planning the proper ABC framework for its requested purposes. A
calculated model introduced in the accompanying figure has been utilized to exhibit the
pertinence of ABC in assembling and administration associations.

Conditions favoring Factors against the

the application Of implementation of
ABC ABC

Go for ABC
or Not?

Implementation of The Timing of ABC

ABC
 Figure 2:

The implementation process was broken down into the following six basic steps:
Step 1: Identify and define activities (such as unit level, batch-level, product-level, customer
level, organization-sustaining) and activity cost pools.
Step 2: Whenever possible, directly trace overhead costs to activities and cost objects
Step 3: Assign costs to activity cost pools
Step 4: Calculate activity rate
Step 5: Assign costs to cost object
Step 6: Prepare Management Report

Thinking about the issue of consistence with monetary announcing necessities, conventional
expense bookkeeping frameworks frequently distribute costs dependent on single-volume
estimates, for example, direct-work hours or machine hours. While utilizing a solitary volume
measure as a general expense driver rarely meets the circumstances and logical results basis
wanted in cost allotment, it's anything but a moderately modest and helpful methods for
agreeing with monetary detailing prerequisites. (Reference book of Management) rather than
conventional expense bookkeeping frameworks, ABC frameworks are not innately obliged
by the principles of monetary revealing prerequisites. Maybe, ABC frameworks have the
intrinsic adaptability to give unique reports to work with the executives choices in regards to
the expenses of exercises embraced to configuration, produce, sell and convey an
organization's items or administrations. At the core of this adaptability is the way that ABC
frameworks centre around amassing costs through a few key exercises, though customary
expense allotment centres around aggregating costs by means of hierarchical units. By
zeroing in on explicit exercises, ABC frameworks give prevalent expense distribution data—
particularly when expenses are brought about by non-volume-based expense drivers. In table
underneath, we are attempting to make an examination among ABC and Non-ABC costing
frameworks:

Particulars ABC Costing Traditional Costing (Non-ABC)

Cost Pools ABC frameworks aggregate expenses
into movement cost pools. These are
intended to compare to the significant
exercises or business measures. By
plan, the expenses in each cost pool are
generally brought about by a solitary
Conventional costing frameworks
collect expenses into office wide or
departmental expense pools. The
expenses in each cost pool are
heterogeneous—they are expenses
of many significant cycles and by
 factor—the expense driver and large are not brought about by
a solitary factor.
Allocation Traditional systems allocate costs
Base ABC systems to products using volume-based
allocation bases: units, direct
allocate costs labor input, machine hours, revenue
etc

to products,
services, and
other cost
objects from
the
activity cos
t pools using
allocation
bases
correspondin
g to cost
drivers of
activity
costs
ABC systems allocate costs to
products, services, and other cost
objects from the activity cost pools
using allocation bases corresponding
to cost drivers of activity costs
Hierarchy Takes into consideration non-linearity By and large gauges the entirety of
of costs of expenses inside the association by the expenses of an association as
unequivocally perceiving that a few being driven by the volume of item
 expenses are not brought about by the
quantity of units created.
Cost Spotlights on assessing the expenses of
objects many expense objects of interest: units,
bunches, product offerings, business
cycles, clients, and providers.
Decision As a result of the capacity to adjust
support distribution bases with cost drivers,
gives more precise data to help
administrative choices.
Cost By giving synopsis expenses of
control hierarchical exercises, ABC takes into
consideration prioritization of cost-the
executives endeavors.
Cost Generally costly to carry out and keep
up.
or administration conveyed
Spotlights on evaluating the costs
of many cost objects of interest:
units, packs, item contributions,
business cycles, customers, and
suppliers.
Due to the failure to adjust
allotment bases with cost drivers,
prompts over costing and under
costing issues.
Cost control is seen as a
departmental exercise as opposed
to a cross-useful exertion.
Cheap to carry out and keep up

Application of ABC
There are two reasons for activity based costing. The first is to forestall cost contortion. Cost
contortion happens in light of the fact that conventional costing consolidates all circuitous
expenses into a solitary expense pool. This pool is assigned based on some asset basic to the
entirety of the organization's items, regularly direct work. Cost bending is forestalled in ABC
by embracing various expense pools (exercises) and cost drivers. The subsequent intention is
to limit squander or non-esteem adding exercises by giving a cycle see which can be
accomplished by movement investigation or potentially the capacity of observing exercises.
In ABC framework costs are dispensed to the tasks through singular exercises, which can be
estimated by the expense drivers. All in all, the expense units are in the principal stage
designated to the individual exercises (like arranging, pressing, quality control), utilizing the
asset cost driver. In the subsequent stage, expenses of those exercises are assigned to the
substantial items or cost objects, which in all actuality caused the incurrence of the
overheads, utilizing the movement cost driver (Horngren, Foster and Datar 1999). The
expense distribution manages the division into essential and auxiliary exercises and its
expense utilization relations. Not all organization exercises are devoured by the outside cost
object (like item or client); a portion of the exercises are burned-through inside the
association, for the in-house needs (like IT, individual administration or framework). After
the all out movement expenses and action yield an action is resolved, the essential rate can be
determined as the remainder of action expenses and yield measures. Hence, the essential rate
addresses action unit costs. Following the computation of essential rates, the following thing
to do is distribute auxiliary exercises to essential ones. It is feasible to take care of the entirety
of the issues identifying with overhead division costs if the measure of auxiliary expense
driver units can be evaluated. These are devoured by singular essential exercises, like the
quantity of workers, SAP licenses and square meters being devoured by an essential
movement like 'Quality control'. The trouble lies in that these optional exercises and their
yield measures are not exclusively devoured by essential exercises however other auxiliary
exercises, just as these exercises themselves (Figure 1). This issue has additionally been
talked about by certain creators (Jacob, Marshall, Smith, 1993). Figure 1 shows how any
exercises commonly burn-through other movement yields. In the event that we dissect, for
instance, the action entitled HR the executives, it is shown that this movement devours yields
of other auxiliary exercises with no guarantees/IT, money and bookkeeping, among others.
These kinds of exercises, giving as they do extra yields for other auxiliary exercises, might be
depicted as corresponding optional exercises

ABC Model for Plastim Company

In the wake of checking on its basic costing framework and the potential miscosting of item
costs, Plastim's chiefs choose to execute an ABC framework. Direct material expenses and
direct assembling work expenses can be followed to items effectively, so the ABC framework
centers around refining the task of circuitous expenses for offices, cycles, items, or other
expense objects. To distinguish exercises, Plastim sorts out a group of chiefs from plan,
manufacturing, conveyance, bookkeeping, and organization. Plastim's ABC framework then,
at that point utilizes these exercises to separate its present single circuitous expense pool into
better pools of expenses identified with the different exercises.
Characterizing exercises is troublesome. The group assesses many undertakings performed at
Plastim. It should choose which undertakings ought to be delegated separate exercises and
which ought to be consolidated. For instance, should upkeep of trim machines, tasks of
embellishment machines, and interaction control be viewed as isolated exercises or
consolidated into a solitary movement? An action based costing framework with numerous
exercises turns out to be excessively nitty gritty and cumbersome to work. An action based
costing framework with too couple of exercises may not be sufficiently refined to gauge
circumstances and logical results connections between cost drivers and different backhanded
expenses. To accomplish a viable equilibrium, Plastim's group centers around exercises that
record for a sizable part of circuitous expenses and joins exercises that have a similar expense
driver into a solitary movement. For instance, the group chooses to consolidate support of
embellishment machines, tasks of trim machines, and interaction control into a solitary action
—forming machine activities—since this load of exercises have a similar expense driver:
shaping machine-hours.
Plastim has created a flowchart of all the steps needed to design, manufacture, and distribute.
The team identifies the following seven activities by developing a flow chart Design products
and processes, clean and maintain the molds after lenses are manufactured, prepare batches of
finished lenses for shipment, distribute lenses to customers, and manage all processes.
Plastim's ABC system subdivides the single indirect cost pool into seven smaller cost pools
related to the different activities. The costs in the cleaning and maintenance activity cost pool
(item d) consist of salaries and wages paid to workers who clean the mold. These costs are
direct costs because they can be economically traced to a specific mold and lens. Plastim's
simple costing system lumped all indirect costs together and the cost-allocation was not a cost
driver of the indirect costs. In the second stage, managers assign costs accumulated in various
account classifications (such as salaries, wages, maintenance, and electricity) to each of the
activity cost pools. This process is commonly called first-stage allocation. We focus here on
the second stage allocation, the allocation of costs of activity cost pool to products. The goal
is to measure how different cost objects used resources. Plastim's managers identify cost
drivers and use their knowledge of operations to choose among them. For example, they
choose setup-hours rather than the number of setups as the cost driver of setup costs because
they believe that more complex setups take more time and are more costly. Over time,
Plastim can use data to test their beliefs over time to find out how much it costs to run a
complex setup.
Cost Hierarchies: A cost hierarchy categorizes various activity cost pools on the basis of the
different types of cost drivers, cost-allocation bases, or different degrees of difficulty in
determining relationships. The output unit–level costs are the costs of activities performed on
each individual unit of a product or service. Batch-level costs relate to activities related to a
group of units rather than an individual unit. Facility-sustaining costs are associated with
maintenance and repair costs. Plastim's ABC system uses parts-square feet, a product-
sustaining cost-allocation base, to allocate design costs to products. Design costs depend
largely on the time designers spend on designing and modifying the product, the mold, and
the process. Plastim can't avoid design costs by producing fewer units or running fewer
batches. The total design costs allocated to S3 and C5 depend on the complexity of the mold -
measured by the number of parts in the mold multiplied by the square feet over which the
molten plastic must flow. Some companies deduct facility-sustaining costs as a separate
lump-sum amount from operating income rather than allocate them to products. Some
companies, such as Volvo, Samsung, and General Electric, allocate all costs to products on
some basis because management believes all costs should be allocated to products even if it's
done in a somewhat arbitrary way. Other companies, like Plastim, allocate their facility-
staining costs to direct labor-hours the pros and cons of this method is a matter of personal
preference.
 Implementing ABC at Plastim
STEP Molding Shipment
Design Molding Machine Distribution Administrati
4: ind Machine Setup
Cost Activity Operations Activity on Activity
Setup Activity Activity
Cntrl 450000 Activity $637500 $391,500 $255,000
$300000 $81,000

12,7500 39,750 Direct

STEP: 2,00 67,500 Cubic
Manufacturin
3 100 Parts- Molding 200 Shipments Feet
Cost
0Setup- Machine- g Labor-
Square feet Delivered Hours
Alloc Hours Hours
ation

STEP 5

4500 150 50 405 5.80 6.4151

STEP 1
Cost OBJ Indirect Costs/Direct Cost

STEP 7

STEP 2:
Direct
cost
Direct Mold
Direct
manufac. cleaning
Materials
Labor Maintenance

Fig: Overview of Plastim’s ABC Costing System

Step 1: Identify the Products That Are the Chosen Cost Objects: The cost objects are the
60,000 S3 and the 15,000 C5 lenses that Plastim will produce in 2014. Plastim’s managers
want to determine the total costs and then the per-unit cost of designing, manufacturing, and
distributing these lenses
Step 2: Identify the Direct Costs of the Products: The supervisors recognize the
accompanying direct expenses of the focal points on the grounds that these expenses can be
financially followed to a particular form also, focal point: direct material expenses, direct
assembling work expenses, and form cleaning and upkeep costs.
Step 3: Select the Activities and Cost-Allocation Bases to Use for Allocating Indirect Costs
to the Products: dentifying the expense distribution bases characterizes the quantity of action
pools into which costs should be gathered in an ABC framework. For instance, instead of
characterize the plan exercises of item configuration, measure plan, and prototyping as
discrete exercises, Plastim's directors characterize these three exercises all together "plan"
movement and structure a homogeneous configuration cost pool. Why? Since a similar
expense driver—the intricacy of the shape—drives the expenses of each plan action. A
second thought for picking an expense designation base is the accessibility of dependable
information and measures. For instance, in its ABC framework, Plastim's directors measure
shape intricacy as far as the quantity of parts in the form and the surface space of the shape
(parts-square feet). On the off chance that these information are hard to get or gauge,
Plastim's managers might be compelled to utilize some other proportion of intricacy, like the
measure of material moving through the shape that may just be pitifully identified with the
expense of the plan action.

Step4 Step 3 Step 5

Activity Cost Total Budgeted Budgeted indirectCause-and-
Hierarch Budgete Quantity of Cost Cost Rate Effect
y d Allocation Base Relationshi
Category Indirect p Between
Cost Allocation
base and
activity
cost
1 2 3 4 5 = 3/4 6
Design Product 450000 100 Parts- 4500 Parts- Design
sustainin square square Department
g feet feet indirect
costs
increases
with more
complex
molds
Setup Batch 300000 2000 Setup 150 Per setup Indirect
Molding level hours hour setup costs
Machines increases
with setup
hours
Machine Output 637500 `1275 Molding 50 Molding Indirect
Operations unit 0 machine machine costs of
level hours hours operating
molding
machines
increases
with
 molding
machine
hours
Shipment Batch 81000 200 Shipment 450 shipment Shipping
setup level s s costs
incurred to
prepare
batches for
shipment
increase
with the
number of
shipments.
Distribution Output 391500 67500 5.8 Distributio
n costs
increases
with the
cubic foot
of
packages
delevered
Administratio Facility 25500 39750 6.415
n sustainin 1
g

Fig 2 : Activity Cost rates for indirect cost pools

Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base: Plastim's
managers try to assign budgeted indirect costs for 2014 to activities on the basis of a cause-
and-effect relationship between the cost-allocation base and the cost of an activity. Some
costs can be directly identified with a particular activity. Other costs need to be allocated
across activities. For example, rent costs are allocated to activity cost pools based on square-
feet area used by different activities.
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base: Figure 2 , section
5,summarizes the estimation of the planned circuitous expense rates utilizing the planned
amount of the expense designation base from Step 3 and the complete planned roundabout
expenses of every activity from Step 4.
Step 6: Compute the Indirect Costs Allocated to the Products: Plastim's operations personnel
indicate the total quantity of time that will be used by each type of lens. For example, the S3
lens is budgeted to use 500 hours and the C5 lens 1,500 hours. The budgeted indirect cost rate
is $150 per setup-hour (Figure 2, column 5)

S. A B C D E F
L
1 60000 15000
2 Simple lenses (S3) Complex lenses
(C5)
3 Total Per unit Total Per unit Total
4 Cost (1) (2)=(1)/6000 (3) (4)=(3)/1500 (5)=(1)+(3)
description 0 0
5 Direct costs
6 Direct $1,125,00 18.75 675000 45.00 1800000
materials 0
7 Direct 600,000 10 195000 13 795000
manufacturing
labours
8 Direct mold 120,000 2 150000 10 270000
cleaning and
maintenance
cost
9 Total Direct 1,845,000 30.75 102000 68 2865000
costs 0
10 Indirect cost of
activities
11 Design
12 S3,30 parts sq- 135000 2.25 450000
ft × $ 4,500
13 C5,70 parts 315000 21
sq-ft × $4,500
14 Setup of
molding
machines
15 S3, 500 setup 75000 1.25 300000
hours × $150
16 C5, 1500 setup 225000 15
hours × $150
17 Machine 637500
operations
18 S3, 9000 450000 7.5
molding
machine hours
× $ 50
19 C5, 3,750 187500 12.50 637500
molding
machine hours
× $50
20 Shipment
setups
21 S3, 100 40500 .67
shipments ×
$405
22 C5, 100 40500 2.7 81000
shipments ×
 $405
23 Distribution
24 S3, 45,000 261000 4.35
cubic feet
delivered ×
$5.80
25 C5,22,500 130500 8.7 391500
cubic feet
delivered ×
$5.80
26 Administratio
n
27 S3, 30,000 dir 192453 3.21 255000
manuf. Labour
hours ×
$6.4151
28 C5, 9,750 dir 62547 4.17
manuf. Labour
hours ×
$6.4151
29 Total indirect 1153953 19.23 961047 64.07 2115000
cost allocated
30 Total Costs 2998953 49.98 198104 132.07 4980000
7
31
Figure : 2 Product cost using ABC
Step 7: Compute the Total Cost of the Products by Adding All Direct and Indirect Costs
Assigned to the Products: Figure 2 presents the item costs for the straightforward and
complex focal points. The immediate expenses are determined in Step 2, and the roundabout
expenses are determined in Step 6. The ABC framework outline in Exhibit 5-3 shows three
direct-cost classifications and six roundabout expense classifications. The planned expense of
every focal point type in Figure 2 has nine details, three for direct expenses and six for
roundabout expenses. The contrasts between the ABC item expenses of S3 and C5
determined in figure 2 feature how each of these items utilizes various measures of
immediate and aberrant expenses in every movement region.

We underscore two highlights of ABC frameworks. To begin with, these frameworks

distinguish all expenses utilized side-effects, regardless of whether the expenses are variable
or fixed in the short run. When settling on since a long time ago run vital choices utilizing
ABC data, chiefs need incomes to surpass complete expenses. Something else, an
organization will cause misfortunes and will to be not able to proceed in business.
Second, perceiving the pecking order of expenses is basic when assigning expenses for items.
 Findings
As previously said, ABC is regaining popularity after a period of decreasing interest, with
theoretical reasons in its favor and assessments in case studies and polls throughout the
world. At the same time, growing recognition of the importance of SMEs, which, as
previously stated, account for more than 90% of all employment worldwide, has fueled
further research into the potential for ABC to help SMEs become more competitive and
thrive in today's competitive market environment, as well as the development and use of
software to implement ABC.
 Product costing that is more precise, as well as a relevant financial and non-financial
metric that assists in cost control and performance evaluation.
 Better profitability metrics and better-informed pricing, product line, and market
segment strategic decisions.
 Accurate overhead cost allocation and detection of waste regions.
 Management's capacity to reduce costs, manage and control budgets, track
performance, and boost efficiency.
 Positive effect on business results.
 Decision-making is made easier, productivity is increased, and tasks that don't bring
value are identified.
 The foundation for strategic decision-making, as well as a means of measuring
ongoing development and performance.
 Managers' concerns regarding cost allocation accuracy, the cause-and-effect link
between allocations and resources utilized, the timeliness of cost/profit information,
and the capacity to update systems are all addressed.
 ABC implementation in SMEs is likewise fraught with difficulties.
Two ideas may be used to the investigation of why SMEs have had difficulty implementing
ABC. First, according to the concept of resource restrictions in small companies, small firms
are resource poor in three categories-time constraints leave little time for activities other than
day-to-day operations, financial constraints prevent investments in and training for new
systems, and expertise constraints stem from a small number of employees who often lack the
specialized skills required to support new technology systems. Second, according to
Attewell's knowledge barrier hypothesis, organizational learning and know-how constraints
are possible hurdles to innovation adoption. The time, financial, and expertise concerns
highlighted by researchers are divided into time, financial, and expertise, and organizational
learning categories below.
 Time constraints: In certain situations, obtaining relevant information throughout the
organization might take a substantial amount of time. Employees at SME's are
frequently so preoccupied with day-to-day operations that they believe they don't have
time to make the changes required to collect data for ABC.
 Financial constraints: Bringing in specialists and managing the system after
deployment might result in high implementation costs. Because they have less
resources yet face the same competitive pressures as bigger firms, SMEs suffer
particularly significant financial concerns. Due to inventory in the supply chain,
SMEs are frequently cash-strapped and cannot purchase software solutions that would
aid in ABC implementation.
 Expertise constraints: While gathering data from multiple organizational functions,
data errors might arise. SMEs struggle to integrate ABC into their existing
organizational structure and IT, as well as to identify activities and analyze outcomes.
Some executives just aren't aware of ABC [76,77,81]. Manufacturing, distribution, IT,
and customer service infrastructure are all restricted in SMEs, which may also lack
the data economies of scale required to function at optimum efficiency. They
frequently lack precise, codified descriptions of business operations, and staff lack the
requisite knowledge, due to limited access to store shelves to display items to
consumers.
 Organizational learning constraints: Some SME executives are unaware of ABC's
influence on the company and/or are skeptical that ABC can give information to aid
decision-making. There is a shortage of data gathering in certain companies, and
identifying the precise data required and showing it in a way that makes sense to
employees is difficult. Service bureaus and consultants can help break down the
organizational learning barrier by training staff and providing and developing the
necessary know-how. Employees may also be hesitant to participate in ABC
implementation because they are unsure of the advantages or believe their
competency is being questioned.

Recommendations
The following "best practices" might help SMEs avoid or mitigate problems while
using ABC:
1. The commitment and support of top management in adopting ABC is critical.
2. All workers who are affected by the process must be aware of it and support it.
3. All staff must be well trained.
4. Employee involvement incentives must be in place.
5. The process should be managed by small teams made up of members from several
departments.
6. Procedures for monitoring and maintaining the ABC system that has been installed
must be established.
7. Data created by the ABC system might be misunderstood, therefore it should be
utilized with caution when making judgments.
8. Because the reports generated by the ABC system do not comply with Generally
Accepted Accounting Principles (GAAP) [99], a company that uses ABC should have
two cost systems: ABC for internal usage and a conventional system for external
reporting.
9. While it is feasible to gather and analyze data for ABC using software such as
Excel, a number of consulting and software firms can assist businesses in adopting
ABC.

Conclusion
Examining actions, particularly in design processes, is critical. This would assist
design experts in better understanding how things are done, allowing them to improve
design efforts. In addition, the fundamental reasons of activity cost may be recognized
and incorporated into management thinking for program improvement. Traditional
costing systems can't provide these capabilities, but activity-based costing can. ABC
may also calculate the cost of the process output, such as the overall cost of
processing a schematic design or the total cost of designing a residential structure.
Indeed, the ABC approach encourages process view thinking and the activities and
programs that go along with it, which is in line with contemporary management trends
like reengineering and lean production theory. This does not imply that the ABC
system is sufficient for assessing processes. Other process indicators, such as cycle
time, must be included in the assessment and improvement process. The amount of
time and money it takes to develop a single design varies greatly. Certain variables
are to blame for the longer design time and, as a result, the higher design cost. The
nature of the design process, which includes multiple iterations, is one of the primary
causes that has increased design time.
One method to reduce iterations and therefore improve the efficacy of design
processes is to improve the design team leader's and members' managerial abilities
(e.g., negotiation, communication, and coordination). In order to evaluate design
processes, object-oriented simulation programs must be used. It enables the modeler
to concentrate on outputs (for example, design deliverables) and how they evolve
from one phase to the next. This allows them to track their expenses as well as their
cycle time, which includes waiting periods. This would provide a clearer view of
design process performance, potential, and limitations.