Professional Documents
Culture Documents
Accounting
Accounting
What is Activity Based Costing Essentials for implementing ABC How ABC make decisions more efficient Intro of case study Discussion Questions of the case study
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.
Involvement of top leadership Responsibility of cross functional teams Evaluation and rewards based on ABC
Identify activities and resources Measure the costs of resources used to perform each activity Determine cost drivers and resource Assign activity costs to products by multiplying the use of the cost drivers by the resource-consumption rates
Topic: Public sector, Activity analysis, value added Company: London Borough
Evaluation of cost drivers Decision about comparing department performance with all similar departments nationally Accuracy of cost and potential areas for cost reduction
Total cost related to staff in department is 200,000 Total number of hours for all staff of the department is 8000
No. 1
Brief description Information packs have been prepared for telephone enquiries or letters to standardise the response to requests for information. Additional research may be necessary but this is not a significant activity. Information packs are provided giving details of labour market, training, financial information and further contacts. The department develops and manages a wide range of projects including environmental improvements, seminars, training projects and joint venture developments. There is a lot of time taken up by preparing reports for committees.
Brief description A policy contribution includes work for different bodies such as the Government departments.
Work for other council departments. It is difficult to define a typical request for information but generally each request involves a similar amount of activity. Other This is time spent on various activities in the department, which Clara will consider in more detail in the future.
Activity
Cost driver
Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other
Number of requests for information from businesses Number of requests for information from developers Number of requests for Committee reports. Number of requests for policy input. Number of requests for information or analysis. Number of hours. Total
14
30 14 6 15 100%
Number of requests for information from businesses Number of requests for information from developers Number of requests for Committee reports. Number of requests for policy input. Number of requests for information or analysis. Number of hours.
550
650
70 140 170
1,200
1,200
Evaluate the choice of cost drivers identified by Clara and discuss how the accuracy of the costs can be improved.
No. 1
Brief description Information packs have been prepared for telephone enquiries or letters to standardise the response to requests for information. Additional research may be necessary but this is not a significant activity. Information packs are provided giving details of labour market, training, financial information and further contacts. The department develops and manages a wide range of projects including environmental improvements, seminars, training projects and joint venture developments. There is a lot of time taken up by preparing reports for committees.
Brief description A policy contribution includes work for different bodies such as the Government departments.
It is difficult to define a typical request for information but generally each request involves a similar amount of activity. This is time spent on various activities in the department, which Clara will consider in more detail in the future.
Number of hours
Cost drivers by the department Number of requests for information from businesses. Number of request for information from developers.
Suggested Cost drivers Number of requests entertained to provide information to businesses Number of requests entertained to provide information to developers
Number of requests for committee reports. Number of hours used to prepare reports Number of requests for policy input Number of requests for information or analysis Number of hours used for policy input Number of hours spent on providing information or analysis
Clara has taken the total cost of the department that is 200,000 and the total number of employees hours 8,000. The above condition implies that the per hour rate of every activity is same that is 25. This may not be the case and every activity cost has to be analyzed individually to improve the accuracy of the costs.
Clara is hoping to use the information to compare the performance of her department with similar departments nationally and also identify potential areas for cost reduction. Discuss.
Costs 42,000
28,000
60,000
28,000 12,000
Other Total
30,000 200,000
Activity
Estimated rate Estimated rate at Estimated rate at at max volume min volume average volume 35 42 38.5
Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other
43.076
50.909
46.99
500
857.14
678.57
155.55 70.58
200 50
177.77 60.29
N.A
N.A
N.A
Activity
Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other
The activity with the title other has to be properly analyzed to help reduce the cost. There are no categorization of work being done under this activity. This activity can neither be classified as value added nor non-value added activity. Proper analysis of this activity can help the organization reduce up to 15% of cost associated with the activity.