Presentation

on

Recent Trends in Activity Based Costing

Presented By
Dr. Sandeep Kumar Kesarwani
Associate Professor & Head of the Department
Faculty of Commerce
Gopal Narayan Singh University Bihar India
 ACTIVITY-BASED COSTING
 

It is a costing system, which focuses on

activities performed to produce products.
ABC is that costing in which costs are first
traced to activities and then to products.
This costing system assumes that activities are
responsible for the incurrence of costs and create
the demands. for activities e.g. an accounting
firm prepares tax returns; a University teaches
students. Costs are charged to products based on
individual product's use of each activity
 Contd….

ABC is generally used as a tool for understanding

product and customer cost and profitability.
 As global competition intensifies, companies are
producing an increasing variety of products and services.
They are finding that producing different products and
services places varying demands on their resources.
 The need to measure more accurately how different
products and services use resources has led companies
such as American Express, Boeing, General Motors, and
Exxon Mobil to refine their costing systems. One of the
main ways companies around the globe have refined their
costing systems is through activity based costing
 BASIC OF ACTIVITY BASED COSTING (ABC)
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 provides
ways of assigning the costs of indirect support resources to
activities, business processes, customers, products.
It recognises that many organisational resources are required
not for physical production of units of product but to provide a
broad array of support activities.
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 which are
consumed by product/services.
Contd……
Contd…..
 EVOLUTION/ EMERGING OF ACTIVITY BASED COSTING SYSTEM

The concepts of ABC were developed in the

manufacturing sector of the United States during the
1970’s and 1980’s.During this time, the consortium
for advanced manufacturing – International , now
known simply as CAM-I , provided a formative role
for studying and formalizing the principles that have
become more formally known as Activity Based
Costing. ABC is developed due to many deficiencies
of Traditional Cost systems, which lead to the
discovery of the ABC System. Which are as under:
Contd………
(i)The present costing system has developed convenient overhead
recovery basis and blanket overhead recovery are acceptable
when valuing stocks for financial reporting, but they are
inappropriate when used for decision-making and typical product
strategy decisions. Such decisions have implications. Over 3-5
years and over this period many fixed costs become variable.
(ii) It’s easy to determine accurate costs of products or services
when a company has only a few products. When companies
expand their product offerings and these products use different
amount of resources such as supervision, quality control it is
more difficult to determine accurate costs of products. This
situation is a main reason why companies use ABC.
Contd…..
(iii) Traditional costing fails to capture cause and
effect relationships. If focused on the cost incurred.

(iv) Traditional accounting was confined merely to

furnish information at product level. The new
manufacturing technology demands the feedback of
performance while production is still in progress
rather than history.

Therefore, in order to overcome the inadequacies

of traditional methods of overhead absorption,
Activity Based Costing has been devised.
DISTINCTION BETWEEN TRADITIONAL ABSORPTION COSTING AND ACTIVIY BASED COSTING
 
We can summarise the main difference between ABC and traditional costing by following picture:
 OBJECTIVES OF ACTIVITY BASED COSTING

1.To improve product costing

2. To identify non-value adding activities in the production process
which might be a suitable focus for attention or elimination
3. To provide required information for decision making
4. To reduce the frivolous (nonessential) use of common resources
5. To encourage managers to evaluate the efficiency of internally
provided services
6. To calculate the full cost of products for financial reporting
purposes and for determining cost-based prices
 TERMINOLOGY OF ACTIVITY BASED COSTING
1. A Cost Object: It is an item for which cost
measurement is required e.g. Product, job or a
customer.
2. A Cost Driver: In an ABC system, the
allocation basis that is used for applying costs to
services or procedures are called cost drivers. It
is a factor that causes a change in the cost of an
activity. Few examples of cost driver as under:
Contd…..
THANK YOU