Accounting For Management ACTIVITY BASED COSTING

Presented By:
Harmeet Singh Sachdeva (01) Sonia Seth (02) Apeksha Rustagi (03) Ankita Banjerjee (04) Nitin Chauhan (05) Gaurav Jain (06)

Activity Based Costing

Activity Based Costing (ABC) is a costing methodology that identifies activities in an organization and assigns the indirect cost (overhead) of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect cost (overhead) into direct costs compared to conventional costing models. It is a technique under which the overhead costs of the organization are identified with each activity, which is acting as the cost driver. As per CIMA, London - It is a technique of Cost attribution to cost units on the basis of benefit received from indirect activities.

Characteristics of Activity Based Costing

Scientific approach developed by Cooper and Kalpan (1988). Assigns overhead to end products. Rectifies inaccurate cost information. Approach for charging indirect costs to products and computing accurate product costs. Overheads are assigned to activities or grouped into cost pools before they are charged to cost objects. It is also called as Transaction Costing.

Use of Activity Based Costing

Helps in Planning: It helps in preparing future budget. Helps in Controlling: It helps in Controlling the additional cost.

Helps in decision making.

Focus on high cost activities.

Helps in eliminating non value adding activities.

Helps in cost reduction

Terminology
Activity Task or unit of work with a purpose. Ex : Setting up of a machine or placing a purchase order Cost Object Item for which cost measurement is required. Ex : A product, service , job or customer. Cost Driver Factor that causes change in cost of an activity. There are two types of cost driver : Resource Cost Driver Activity Cost Driver

Steps in Activity Based Costing

Identification of the main activities Creation of cost pools Determination of activity cost drivers Calculation of cost driver rate
Activity cost driver rate = Total cost of activity / Cost Drivers

Charging the costs of activities to products

Advantages of Activity Based Costing

Accurate and reliable Better pricing decisions

Realistic
Control of cost

Greater cost efficiency

Problems with Activity Based Costing

Data collection process for this system is very time consuming. Cost of change will be high as everything will have to be worked out from scratch. Difficult to correlate marginal increase in cost with particular cost driver.

As it requires a change due to changes associated with new products and new technology, it will put strain on the costing system.

Illustration on Activity Based Costing

Q. A company has two overhead departments whose costs are listed below: Manufacturing Overhead (MO) : Rs 500000 Selling and Administrative Overhead (SAO) : Rs 300000 Activity Cost Pool Assembling units Processing orders Activity Measures Number of units Number of orders

Distribution of Overhead Costs Across Activity Cost Pools Assembling Units Processing Orders MO 50% 35% SAO 10% 45% Total activity 1000 units 250 orders Calculate overhead costs for 80 units and 4 orders ?

Solution
Step 1 : Allocation of costs to activity cost pools Assembling Units MO Rs 250000 SAO Rs 30000 Total Activity Cost Rs 280000 Processing Orders Rs 175000 Rs 135000 Rs 310000

Step 2 : Activity Rates for Activity Cost Pools Total Costs Assembling Units Rs 280000 Processing Orders Rs 310000

Total Activity 1000 units 250 orders

Activity Rate 280 per unit 1240 per order

Step 3 : Overhead Cost for 80 units and 4 orders Activity Cost Pools Total Cost Assembling units Rs 280 per unit Processing orders Rs 1240 per order

Total Activity 80 units 4 units

Activity Rate Rs 22400 Rs 4960

Thank You

Questions ?