Professional Documents
Culture Documents
Activity Based Costing
Activity Based Costing
COSTING SYSTEM
PRESENTED BY
OMER ALI KHAN
PARACKEL BLESSON MATHEW PRIYA P
RACHEL B MALEGESI
RAJESH KUMAR
DELUXE
ULTIMATE
PLANNED ANNUAL
PRODUCTION
VOLUME IN UNITS
PRODUCTION RUN
DIRECT MATERIAL
DIRECT LABOR
MACHINE HOURS
PER PRODUCT
TOTAL MACHINE
HOUR
10000
8000
2000
80 runs of 125 80 runs of 100 40 runs of 50
units
units
units
$100
$120
$180
$180(9hours $220(11hours $260(13hour
@20)
@20)
s@20)
10
12
17
100000
960000
340000
DIRECT MATERIAL
DIRECT LABOR
MANUFACTURING OVERHEAD
TOTAL
90000
88000
26000
204000
Deluxe
Ultimate
Production cost
under traditional
volume based
system
$496.00
$604.00
$752.00
$595.00
$724.80
$902.40
$585.00
$705.00
$940.00
Meaning:
Activity based costing is an accounting methodology
that assigns costs to activities rather than products
or services .
Focuses on activities as the fundamental cost
objects.
Costs are grouped according to what causes them to
be incurred.
Characteristics :
1)It lays emphasis on different costs for different purposes and
only those costs are identified which are relevant to a
particular decision.
2)The more important distinction between cost behaviour
patterns are volume related , time related and events related.
3)Cost drivers(activities those generate costs) need to be
identified.
4)The reporting of costs incurred on significant activities
provides basis for understanding what causes overhead costs.
4)Effective method of excercising cost control.
5)It aims at rectifying inaccurate cost information.
ABC approach
2)Rational basis of
assigning indirect costs to
various activities.
3)Improved decision
making such as fixing
selling price and
pinpointing the area where
cost reduction is possible.
Cost driver
It is a characteristic of an activity of an event or
activity that results in the incurrence of costs.
Assigning costs of
Individual activities
Activity
cost
pools
Product
lines
Application
of cost driver
rates
Overhead costs
Total budgeted cost = $4,896,000
Activity
cost
pools
Machine related
cost pool
$ 1,242,000
Engineering
design cost pool
$ 130,000
Faci;ity
cost pool
$ 2,300,000
ABC Data and Calculation for the machine Related cost Pool: Patio
Grill company
DEL
ULT
DIRECT MATERIAL
$100.00
$120.00
$180.00
DIRECT LABOR
$180.00
@220.00
@260.00
$280.00
$340.00
$440.00
MACHINE RELATED
$54.00
$64.80
$440.00
SET UP
8.40
10.50
21.00
PURCHASING
10.00
12.00
52.00
MATERIAL HANDELING
13.60
17.00
34.00
QUALITY ASSURANCE
4.00
5.00
15.00
PACKING
12.00
12.00
24.00
ENGINEERING DESIGN
5.00
5.00
20.00
FACILITY
100.00
120.00
170.00
$207.00
$246.30
$427.80
$487.00
$586.30
$867.80
INDIRECT COST
Stages of ABC
ABC stage one -- Overhead costs are allocated to
activity cost pools.
Unit level:
Performed each time a unit is produced
Batch level:
Performed each time a batch is produced rather than
a unit.
Product-sustaining level:
It includes activities that are needed to support entire product line .
Facility level [general operations level]:
These activities are required in order for the entire production process to
occur
Cost drivers
1) Material planning
No. of material
transactions
Volume of material
receipts
Volume of material orders
2)Maintenance
No. of machine
breakdowns
Maintenance schedule
Capital expenditure
Activity levels
3) Customer order
processing
Order value
Order source
Customer location
4)Inspection
Inspection plans
Number of problem
suppliers
Lack of good quality
STD
DEL
ULT
$216.00
207.00
$264.00
246.30
$312.00
427.80
496.00
487.00
604.00
586.30
752.00
867.80
595.20
724.80
902.40
584.40
703.56
1041.36
585.00
705.00
940.00
Which product
should we
promote?
Gaining
competitive
advantage
Which distribution
channels should we follow?
Advantages of ABC
More accurate
Understand how costs are
actually consumed
Use of more cost pools to assign overhead costs
Enhanced control over overhead costs
Better management decisions
Improvement in performance
Product/service pricing
Make or buy decision
Transfer pricing
Determination of products
service costs
Limitations of ABC
Can be expensive to use
Does not measure incremental costs
ABC system
2.Eliminating material
handling activities.
3.Using common
components
Conclusion:
In order to reduce the direct cost of the
product , we can control the overheads when
one has the information of cost centres.
It becomes necessary to have a costing
system based on activity done.
Can not be applied if there is no clear
distinction for the costs attached to various
activities.
Implemented in different segments of an
organisation .
Equally applied in service sectors.
Thank You!!