WELCOME

TOPIC – ACTIVITY BASED

COSTING
A project submitted to
University Of Mumbai for partial completion of
the degree of
Bachelor of Commerce (Accounting and Finance)
Under the faculty of Commerce
By
Hanbar Shubham Anandrao
Under the Guidance of
Prof. Ratnavali Limaye mam
Changu kana Thakur Art’s, Commerce and Science
College, Sector- 11, New Panvel
 CONTENTS
 Introduction

 Objectives

 Features

 Implementation of ABC

 Advantages

 Disadvantages

 Conclusion

 Reference
 INTRODUCTION

• 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.
 OBJECTIVES OF ABC

1. To rectify the inaccurate cost information.

2. To allocate the overheads on activity basis.

3. To help the management in taking quality and timely decision.

 FEATURES OF ACB

1. The total cost is divided into two types i.e. fixed cost and variable cost which
is necessary to provide quality information to design a suitable cost system in a
manufacturing concern.

2. The proper distinction is made between the cost behavior patterns.

3. The cost behavior patterns are volume related, diversity related, events related
and time related.
 IMPLEMENTATION OF ABC

1. Identify the functional areas of organization.

2. Identify the main activities of each functional areas.

3. Allocate common indirect costs to each functional areas on suitable basis.

4. Identify the most suitable cost driver in each activity under functional areas.

5. Preparing the statement of expenditure on activity wise.

 ADVANTAGES OF ABC

1. It helps understanding the behavior of overhead costs and their relationship to products,
services, customers and market segments.

2. It helps to allocate the resources to those activities that will increase shareholders value.

3. It links profitability analysis to operational decisions.

4. It ensures that the cost of non-value added activities is visible to management.

5. It provides the right information for performance measurement because it focuses on activities
rather than resources.
 DISADVANTAGES OF ABC

1. It is essentially not the answer for all problems.

2. It absorbs a lot of resources.

3. Too much emphasis on customer viability can lead to problems such as cheaper
products and, therefore, potentially lower sales.

4. It may lead to weaker customer segmentation.

5. It takes no account of opportunity cost.

 CONCLUSION

Activity-based costing is a different way of looking at an organization's costs in order to

optimize profit margins.

If ABC is implemented with the correct understanding for the correct purpose, it can return
a great long-term value to the organization.
 REFERENCE

• www.accountlearning.com/

• www.accountingnotes.net/

• www.Wikipedia.com