Scribd
Upload
1K views

Module 11. Activity Based Costing

Activity Based Costing (ABC) is a costing method that assigns overhead costs to products based on activities consumed. It identifies activities performed to produce products and relates costs to activities and outputs produced. ABC provides better cost allocation and visibility. It involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs. ABC helps identify profitable and unprofitable products and supports strategic decision making.

Uploaded by

yogah_33
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
1K views

Module 11. Activity Based Costing

Activity Based Costing (ABC) is a costing method that assigns overhead costs to products based on activities consumed. It identifies activities performed to produce products and relates costs to activities and outputs produced. ABC provides better cost allocation and visibility. It involves analyzing activities, gathering cost data, tracing costs to activities, establishing output measures, and analyzing costs. ABC helps identify profitable and unprofitable products and supports strategic decision making.

Uploaded by

yogah_33
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 24

Module 11

ACTIVITY BASED COSTING

Dr. Varadraj Bapat


Activity Based Costing
(ABC)
2

•Concept of ABC
•Traditional Costing V/s ABC
•Treatment of cost under ABC
•Steps of ABC
•Benefits
•Limitations
•Activity Based Management: ABM
•Relation between ABC & ABM
Dr. Varadraj Bapat
Reasons to choose the
right way of costing
3

In business, arriving at the


correct cost is very important,
because it:
• identifies money-makers and
money losers;
• finds an economic break-even
point;
Dr. Varadraj Bapat
4

• facilitates opportunities for cost


control.
• permits comparison of different
options; and
• enables strategic decision
making.

Dr. Varadraj Bapat


The Concept of ABC
5

Activity-Based
Costing
Departmental
Overhead i ty
Rates ex
p l
o m
Plant-wide f C
Overhead lo e
v
Rate Le
Overhead Absorption
Dr. Varadraj Bapat
The Concept of ABC
6

Overhead Absorption
Departmental Department D1 OH
Overhead Rate = Overheads
Rates Apportioned /
Machine Hours

Plant-wide Plant OH Rate =


Overhead Overhead Cost /
Rate Machine Hours
Dr. Varadraj Bapat
Introduction
7

 ABC is a costing system,


which focuses on activities
performed to produce
products.
 ABC relates cost (resources
consumed) to work
accomplished (outputs
produced).
Dr. Varadraj Bapat
8

 ABC is a management tool that


provides better allocation of
resources.
 The ABC or unit cost goal is a
benchmark that represents an
expectation of the cost
incurred for the production of
an output.
Dr. Varadraj Bapat
9

 ABC aligns costs to outputs


thereby increasing cost
visibility, and is useful in
forecasting financial
baselines.
Dr. Varadraj Bapat
Traditional
Costing V/s ABC
10

ABC Traditional

Resources Everything in Resources


Organization

Consume Traced by Resource Allocate


Drivers
What is actually
Activities being done Cost Centre

Consume Traced by Activity


Drivers
-Products/Services - Products
Objects Objects
- Customers - Services
- Etc
ABC’s Basic Premise
11

 Cost objects consume activities.


 Activities consume resources.

 This consumption of resources is

what drives costs.


 Understanding this relationship is

critical to successful budget


management.
Dr. Varadraj Bapat
Treatment of
Costs under ABC
12

In ABC, products are assigned the


overhead costs that are supposed to
be related to the allocation base.
 Non-manufacturing costs

 Manufacturing costs

 Plant wide Overhead Rate

 Departmental Overhead Rates

 Costs of idle capacity

Dr. Varadraj Bapat


ABC’s Basic Steps
13

1 . Analyze activities.
2 . Gather cost data.
3 . Trace costs to activities.
4 . Establish output measures.
5 . Analyze costs.

Dr. Varadraj Bapat


ABC’s Basic Benefits
14

 Makes it possible to determine


production cost traced to
outputs.
 Targets areas needing
management attention.
 Encourages the consideration of
alternative methods of
production.
 Highlights operational efficiency.
Dr. Varadraj Bapat
15

 Identifies financial benchmarks


for activity performance.
 Generates more information to
measure and reward
performance, and prioritizes
activities for cost reductions.
 Provides a common managerial
framework among support
activities.
Dr. Varadraj Bapat
Limitations of ABC
16

 Trade-off between expense and


accuracy.
 Need for more precise data

 Need of full support of top level

management, and support of


ABC based performance review.
Dr. Varadraj Bapat
17

 Cases of overstated costs and


under-stated margins and
mistakes in pricing and other
critical decisions.

Dr. Varadraj Bapat


18

Activity Based
Management
18

Activity based management involves


any use of ABC information to support
the organization’s strategy, improve
operations, or manage activities and
their resulting costs.

Dr. Varadraj Bapat


19

19

Activity Based Costing


establishes relationships between
overhead costs and activities so that
we can better allocate overhead
costs.
Activity-based management
focuses on managing activities to
reduce costs.
Dr. Varadraj Bapat
20

Relation ABC and ABM


20

Cost Assignment View

Resource costs ABM

Process View
Activity Analysis Activity Evaluation

Root Activity Performance


Causes Triggers Measures
Activities

Cost Objects
Dr. Varadraj Bapat
21

Eliminating non-
21
value added costs
using ABM

•Identifying Activities
•Identifying non-value added activities
•Understanding activity linkage, root
causes and triggers
•Establishing performance measures
•Reporting non value added costs
Dr. Varadraj Bapat
22

22

ABM seeks to satisfy


following customers needs
•Lower costs
•Higher quality
•Faster response time
•Greater innovation

Dr. Varadraj Bapat


23

23

Customer
Profitability Analysis

Customer profitability analysis


uses activity-based costing to
determine the activities, costs and,
profit associated with serving
particular customers.
Dr. Varadraj Bapat
24
Customer Profitability
Analysis
24

A costly customer is one:


Demands
Orders faster
small service
quantities
Requires
special
packaging

Often
changes Orders
orders frequently

Dr. Varadraj Bapat

You might also like