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Activity Based Costing
What?
Why?
How?
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Requirement of Cost Systems
Valuation of inventory and measurement of the cost of goods sold
for financial reporting.
Estimation of the costs of activities, products, services, and
customers.
Providing economic feedback to managers and operators about
process efficiency.
-
Todays businesses are working in an increasingly complex
environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
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Chart5
305020
304030
303040
302050
Direct Material
Labour
Overheads
Composition of Cost
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet1
Direct Material
Labour
Overheads
Composition of Cost
Sheet2
Sheet3
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Conventional Costing
Total Cost = Material + Labour+ OverheadsOverheads are allocated
to the products on volume based measures e.g. labour hours, machine
hours, units produced
Will this not distort the costing in the new environment?
ABC provides an Alternative.
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Conventional Costing
Expenses
Cost Objects
AB Costing
Resources
Activities
Cost Objects
Economic Element
Work Performed
Product or service
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Basics of A B C
Cost of a product is the sum of the costs of all activities
required to manufacture and deliver the product.Products do not
consume costs directlyMoney is spent on activitiesActivities are
consumed by product/services
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Basics of A B C (contd.)
ABC assigns Costs to Products by tracing expenses to activities.
Each Product is charged based on the extent to which it used an
activity
The primary objective of ABC is to assign costs that
reflect/mirror the physical dynamics of the business
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Basics of A B C (contd.)
Provides ways of assigning the costs of indirect support
resources to activities, business processes, customers, products.It
recognises that many organisational resources are required not for
physical production of units of product but to provide a broad
array of support activities.
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ABC systems addresses the following Questions:
What activities are being performed by the organisational
resources?How much does it cost to perform activities?Why does the
oranisation need to perform those activities?How much of each
activity is required for the organisations products, services, and
customers?
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Basics of A B C : How?
Steps:
Form cost poolsIdentify activitiesMap resource costs to
activitiesDefine activity cost driversCalculate cost
Cost pools are groups or categories of individual expense
items
-
Identify Activities
In developing an ABC system, the organisation identifies the
activities being performed:
Move material Schedule productionPurchase materialInspect
items
Respond to customers Improve productsIntroduce new
productsExplore new markets
Activity Dictionary
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Map resource costs to activities
Financial accounting categorises expenses by spending code;
salaries, fringe benefits, utilities, travel, communication,
computing, depreciation etc.
ABC collects expenses from this financial system and drive them
to the activities performed.
-
Mapping
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
ActivitiesActivity RateContainersBaby Product
Unit Level
Acquire and Use material for containers0.041,200,00048,000
Acquire and Use material for baby-care products107,00070000
Batch Level
Set up manually controlled machines300123,600
Set up computer controlled machines600169600
Product Level
Design and manufacture moulds1000
11,000
44000
Use manually controlled machines15000115,000
Use conputer controlled machines40000140000
Customer Level
Consult customers100
Containers2200
B.products404000
Provide warehousing for customers0.2
Containers8,0001,600
B.products2,000400
Faciltiy Level
Manage workers0.2
Containers4,000800
B.products10,0002000
Use main building3
Containers5,00015,000
B.products7,00021000
85,200151,000
Sheet3
Accounting RecordsABC Records
Salaries313,000ActivitiesSalariesDepreciationElectricitySuppliesTravelTotal
Depreciation155,000Business
Development20,000250005000500055,000
Electricity132,000Maintianing Present
Business80,0006000050000500010000205,000
Supplies25,000Purhcasing
Material125,00050000200002000060000275,000
Travel100,000Set up Machines25,00010000200037,000
Total725,000Running Machines50,0001000050000110,000
Resolve Quality Problems13,00050002500043,000
Total313,00015500013200025000100000725,000
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
ActivitiesActivity RateContainersBaby Product
Unit Level
Acquire and Use material for containers0.041,200,00048,000
Acquire and Use material for baby-care products107,00070000
Batch Level
Set up manually controlled machines300123,600
Set up computer controlled machines600169600
Product Level
Design and manufacture moulds1000
11,000
44000
Use manually controlled machines15000115,000
Use conputer controlled machines40000140000
Customer Level
Consult customers100
Containers2200
B.products404000
Provide warehousing for customers0.2
Containers8,0001,600
B.products2,000400
Faciltiy Level
Manage workers0.2
Containers4,000800
B.products10,0002000
Use main building3
Containers5,00015,000
B.products7,00021000
85,200151,000
Sheet3
Accounting RecordsABC Records
Salaries313,000ActivitiesSalariesDepreciationElectricitySuppliesTravelTotal
Depreciation155,000Business
Development20,000250005000500055,000
Electricity132,000Maintianing Present
Business80,0006000050000500010000205,000
Supplies25,000Purhcasing
Material125,00050000200002000060000275,000
Travel100,000Set up Machines25,00010000200037,000
Total725,000Running Machines50,0001000050000110,000
Resolve Quality Problems13,00050002500043,000
Total313,00015500013200025000100000725,000
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Activities: Types
Unit level: Performed each time a unit is producedBatch level:
Performed each time a batch is producedProduct level: Performed to
support production of different type of productCustomer Level:
Performed to support servicing customersFacility level:Residuary
head
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Define activity drivers
The linkage between activities and cost objects, such as
products, customers,, is accomplished by using activity drivers.An
activity driver is a quantitative measure of the output of an
activity.The selection of an activity driver reflects a subjective
trade-off between accuracy and cost of measurement.
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Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
ActivitiesActivity RateContainersBaby Product
Unit Level
Acquire and Use material for containers0.041,200,00048,000
Acquire and Use material for baby-care products107,00070000
Batch Level
Set up manually controlled machines300123,600
Set up computer controlled machines600169600
Product Level
Design and manufacture moulds1000
11,000
44000
Use manually controlled machines15000115,000
Use conputer controlled machines40000140000
Customer Level
Consult customers100
Containers2200
B.products404000
Provide warehousing for customers0.2
Containers8,0001,600
B.products2,000400
Faciltiy Level
Manage workers0.2
Containers4,000800
B.products10,0002000
Use main building3
Containers5,00015,000
B.products7,00021000
85,200151,000
Sheet4
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Sheet3
Accounting RecordsABC Records
Salaries313,000ActivitiesSalariesDepreciationElectricitySuppliesTravelTotal
Depreciation155,000Business
Development20,000250005000500055,000
Electricity132,000Maintianing Present
Business80,0006000050000500010000205,000
Supplies25,000Purhcasing
Material125,00050000200002000060000275,000
Travel100,000Set up Machines25,00010000200037,000
Total725,000Running Machines50,0001000050000110,000
Resolve Quality Problems13,00050002500043,000
Total313,00015500013200025000100000725,000
ActivitiesDriversActivity Cost
Activity Volume
Activity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet 48,00016,0003
MBD00041CFA.xls
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
Sheet3
-
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
Sheet3
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Ascertaining Cost
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
ActivitiesA. RateA.VolumeContainersBaby Product
Unit Level
Acquire and Use material for containers0.041,200,00048,000
Acquire and Use material for baby-care products107,00070000
Batch Level
Set up manually controlled machines300123,600
Set up computer controlled machines600169600
Product Level
Design and manufacture moulds1000
11,000
44000
Use manually controlled machines15000115,000
Use conputer controlled machines40000140000
Customer Level
Consult customers100
Containers2200
B.products404000
Provide warehousing for customers0.2
Containers8,0001,600
B.products2,000400
Faciltiy Level
Manage workers0.2
Containers4,000800
B.products10,0002000
Use main building3
Containers5,00015,000
B.products7,00021000
Total Cost85,200151,000
Sheet4
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Sheet3
Accounting RecordsABC Records
Salaries313,000ActivitiesSalariesDepreciationElectricitySuppliesTravelTotal
Depreciation155,000Business
Development20,000250005000500055,000
Electricity132,000Maintianing Present
Business80,0006000050000500010000205,000
Supplies25,000Purhcasing
Material125,00050000200002000060000275,000
Travel100,000Set up Machines25,00010000200037,000
Total725,000Running Machines50,0001000050000110,000
Resolve Quality Problems13,00050002500043,000
Total313,00015500013200025000100000725,000
ActivitiesDriversActivity Cost
Activity Volume
Activity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet 48,00016,0003
MBD00041CFA.xls
Sheet1
T1T2E3T4
Direct Material30303030
Labour50403020
Overheads20304050
Sheet2
ActivitiesDriversActivity CostActivity VolumeActivity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet48,00016,0003
Sheet3
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Building an ABC Model
Identify
Resources
Identify
Activities
Identify
Cost Objects
Define
Resource
Drivers
Define
Activity
Drivers
Enter
Resource
Costs
Enter
Resource
Driver Qty.
Enter
Activity
Driver Qty.
Calculate
Costs
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ABC: Where to Use?
High OverheadsProduct Diversity or Multiple ProductsCustomer
DiversityService DiversityStiff Competition
ActivitiesSalariesDepreciationElectricitySuppliesTravelTotal
Business Development20,000250005000500055,000
Maintianing Present Business80,0006000050000500010000205,000
Purhcasing Material125,00050000200002000060000275,000
Set up Machines25,00010000200037,000
Running Machines50,0001000050000110,000
Resolve Quality Problems13,00050002500043,000
Total313,00015500013200025000100000725,000
ABC Records
ActivitiesDriversActivity Cost
Activity Volume
Activity Rate
Unit Level
Acquire and Use material for containersNo. of
Containers40,0001,000,0000.04
Acquire and Use material for baby-care productsNo. of
products80,0008,00010
Batch Level
Set up manually controlled machinesNo. of batches of
containers3,00010300
Set up computer controlled machinesNo. of batches of B.
Produst12,00020600
Product Level
Design and manufacture mouldsNo.of moulds required5,00051000
Use manually controlled machinesProduct type
(containers)15,000115000
Use conputer controlled machinesProduct type
(B.Products)40,000140000
Customer Level
Consult customersNo. of consultations4,00040100
Provide warehousing for customersNo. of cubit
feet2,00010,0000.2
Faciltiy Level
Manage workersSalaries3,00015,0000.2
Use main buildingSquare feet 48,00016,0003
ActivitiesDrivers
Unit Level
Acquire and Use material for containersNo. of Containers
Acquire and Use material for baby-care productsNo. of
products
Batch Level
Set up manually controlled machinesNo. of batches of
containers
Set up computer controlled machinesNo. of batches of B.
Produst
Product Level
Design and manufacture mouldsNo.of moulds required
Use manually controlled machinesProduct type (containers)
Use conputer controlled machinesProduct type (B.Products)
Customer Level
Consult customersNo. of consultations
Provide warehousing for customersNo. of cubit feet
Faciltiy Level
Manage workersSalaries
ActivitiesA. RateA.VolumeContainersBaby Product
Unit Level
Acquire and Use material for containers0.041,200,00048,000
Acquire and Use material for baby-care products107,00070000
Batch Level
Set up manually controlled machines300123,600
Set up computer controlled machines600169600
Product Level
Design and manufacture moulds1000
11,000
44000
Use manually controlled machines15000115,000
Use conputer controlled machines40000140000
Customer Level
Consult customers100
Containers2200
B.products404000
Provide warehousing for customers0.2
Containers8,0001,600
B.products2,000400
Faciltiy Level
Manage workers0.2
Containers4,000800
B.products10,0002000
Use main building3
Containers5,00015,000
B.products7,00021000
Total Cost85,200151,000
0
100
1234
Composition of Cost
Direct MaterialLabourOverheads
Salaries313,000
Depreciation155,000
Electricity132,000
Supplies25,000
Travel100,000
Total725,000
Accounting Records
