Activity based costing
- 1. Activity Based Costing Presented By: Kartik Bansal MBA
- 2. What is Costing Costing is any system for assigning costs to an element of a business. Costing may involve only the assignment of variable costs, which are those costs that vary with some form of activity. Type of costing Direct cost. (such as sales or the number of employees). Variable cost. (cost of materials varies with the number of units produced)
- 3. . Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. ... The latter utilize cost drivers to attach activity costs to outputs.
- 4. Origin During 1980’s, the limitations of absorption costing system were felt with severity. Companies were looking for a system that could reflect true product cost in order to fight competition. This criticism of Traditional costing led to generation of the idea of ABC system. David Cooper and Robert Kaplan wrote articles on the idea of ABC system in 1990 and 1992. The new system was accepted widely and became reality of the day. Now ABC system has become part of every management accounting and being implemented the world over.
- 5. Traditional Costing Concept Traditional costing is the allocation of factory overhead to products based on the volume of production resources consumed. Under this method, overhead is usually applied based on either the amount of direct labor hours consumed or machine hours used. IT is cost pool of one or a limited number It is suited for low-intensive & Low-overhead companies It is Simple & inexpensive Focuses on managing cost of functional departments or responsibility centers
- 6. Traditional vs. Activity based
- 7. WHY ABC NOW? Competitive demands for diverse products/services. Increased significance of overhead costs -Growth of non-unit based overhead -Consumption ratios of unit based and non-unit based overhead items differ. Improved information technology. Significance of strategic decisions.
- 8. Two-Stage Cost Allocation How a two-stage product costing system works: - First Stage: allocate overhead costs to departments. - Second Stage: allocate department overhead costs to the products or services. How Activity- Based Costing and a two- stage product system are related: - Stage 1: Assign costs to activities - Stage 2: Assign costs to products based on the use of each activity.
- 9. Process
- 10. Developing Activity-Based Costs STEP 1: Identify the activities that consume resources and assign costs to them. STEP 2: Identify the cost drivers associated with each activity. STEP 3: Compute a cost rate per cost driver unit or transaction. STEP 4:Assign costs to products by multiplying the cost driver rate by the volume of the cost driver units consumed by the product.
- 11. Advantages ABC system provides accurate costing of products/services. Management has better understanding overheads cost. The system utilizes unit cost rather than total cost unlike absorption costing system. The in-depth study of overheads cost under ABC system makes all wastages visible to management and all non- value added activities known to them. Thus, better controls can be exercised on them. It supports performance management and scorecards. The system enables costing of processes, supply
- 12. Disadvantages Implementing ABC system requires a big budget initially. After implementation, the maintenance of the system is costly. Data concerning numerous activity measures must be collected , checked, and entered into the system on regular basis. ABC system produces numbers such as product margins that are different from the profits produced by traditional costing system. Management may be double minded as they are used to work with traditional costing system, as a requirement for external reporting. ABC system generated data can be misinterpreted and must be used with care when used in making decisions. Costs assigned to products, customers and other cost objects are only potentially relevant. Reports generated by ABC system do not conform to Generally Accepted Accounting Principles (GAAP). Consequently, an organization involved in ABC should have two cost systems - one for internal use and one for preparing external reports.
- 13. . What is Costing Concept & Origin of ABC Traditional Costing Concept Difference Between Traditional & ABC Process Advantage & Disadvantage Two stage cost Allocation Developing Activity-Based Costs
- 14. Now I open the house for Question & Answer