13813 activity based costing

8/8/2019 13813 Activity Based Costing

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Activity Based Costing

Presentation by

Prof. Asish K Bhattacharyya

Indian Institute of Management

Calcutta


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OBJECTIVES

OFABC

To improve accuracy of product cost To improve cost management


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FOCUS

OFABC

ABC focuses on support services,

particularly which are influenced by the

diversity and complexity of output rather

than simply by the volume of output.


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TRANSACTIO

N TYPES

Logistical transactions: concerned with

organizing the flow of resources

Balancing transactions: concerned with

matching supply of resources with demand

Quality transactions: concerned with the

validation that outputs match specifications

Change transactions: concerned with

providing ability to cope with changes


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ABC PRO

CESSFundamental Assignment to

Cost objects other cost objects

activities Costs of

activities

Cost objects:

Products

Service

Customers


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HIERARCHYOF

RESOURCES

Unit-level resources

Batch-level resources Product-level resources

Customer-level resources

Facility-level resources


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UNIT LEVEL RESO

URCES

Resources that are acquired specifically forindividual units of products or services.

Examples: Materials, parts, components,

labour, and energy.


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BATCH

LEVEL RESO

URCESResources acquired as a result of decision to

make a group or batch of similar products.

Examples: Materials, specialized labour,

and equipment

Direct to batches

Indirect to individual units of output


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PRODUCT-LEVEL

RESOURCES

Acquired as a result of the decision to

produce and sell a specific product or

service.

Examples: Specialized equipment, software,

and personnel.

Direct specific product or services

Indirect to batches or individual units

produced


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CUSTOMER-LEVEL

RESOURCESResources acquired as a result of decisions

to serve specific customers.

Examples: Specialized equipment, software,

and personnel

Direct to specific customers

Indirect to product-, batch-, or unit-level

decisions.


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FACILITY-LEVEL

RESOURCESResources are acquired as a result of decisions to

provide a general capacity to produce product or

services. Examples: Business support services, land,

buildings, management.

Direct to decisions about scale,scope, location, and

technology

Indirect to customers, products, batches, and

levels of output


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CO

STD

RIVER

A factor that causally affects costs over

a given time span


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TYPESOF

CO

STD

RIVERSCost Drivers

Structural Executional

cost drivers cost drivers


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HIERARCHY OF ACTIVITIES

Productsustaining

Customer

sustaining

Batch

Unit


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UNIT LEVEL ACTIVITIES Represent work performed for every unit of

product or service produced

The quantity of resources used is proportion

to volume

Cost drivers include labour hours, machine

hours, and materials quantity processed


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BATCH

LEVEL ACTIVITIES Include setting up a machine,purchasing

materials, and processing a customer order

Resources required are independent of

number of units in the batch


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PRODUCTION/CUSTOMER

SUSTAINING ACTIVITIES

Activities to ensure production of an

individual product or to service an

individual customer.

Resources required are independent of the

volume and the mix of products or servicessold to a customer.


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IDENTIFICATIONOF

ACTIVITIES

Top-down approach

Interview or participative approach

Recycling approach


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TO

P-DOW

N APPRO

ACH

Activity list is developed based on the

teams understanding of the organizations

process.

It is quick and inexpensive.

The team should have thorough

understanding and experience of thebusiness process..


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INTERVIEWOR

PARTICIPATIVE APPROACH

Analysis team interviews employees

Team of employees identify the activitiesthat they perform

Higher level of accuracy as compared to

top-down approach Dangers: Lack of truthful disclosures; False

recall


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RECYCLING APPRO

ACH

It may be possible to reuse documentation ofprocesses developed for other purposes.

For example documents developed for ISO

9000 certification may be used


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SELECTING COST DRIVER

BASES

An activity driver is a quantitative measure

of the output of a activity.

A cost driver base is a measurable cause or

driver of performing an activity.


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TYPES OF ACTIVITY

DRIVERS

Transaction drivers

Duration drivers

Intensity drivers


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TRANSACTIO

ND

RIVERS Examples: Number of setups; Number of

receipts; Number of products supported.

Assumes that all outputs makes

essentially the same demands on the

activity

Least expensive

Could give inaccurate results


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DURATI

OND

RIVERS Represent the amount of time required to

perform an activity.

Should be used when significant variation

exists in the amount of activity required for

different outputs.

Examples: Setup hours; Inspection hours;Labour hours


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INTENSITYD

RIVERS Intensity drivers directly charge for the

resources used each time an activity is

performed.

Most accurate, but most expensive.

Should be used only when the resources

associated with performing an activity areboth expensive and variable each time an

activity is performed.


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CHOOSING THE BEST

COST-DRIVER BASE

An appropriate cost driver base should:

Logically have a cause and effectrelationship with the activity and the use of

resources

Be feasible to measure


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CHOOSING THE BEST

COST-DRIVER BASE

Predict or explain activities use ofresources with reasonable accuracy

Be based on practical capacity of the

resource to support activities


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MEASURING RESOURCE

COST TO ACTIVITIES

Employee Activity Data sheet

Department

Name,title,and salary/Hourly rate

Activity number and activity description

Hour booking against

departments/products/services


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HIGHER LEVEL

RESOURCESIf higher level resources are both necessary

and used for lower level activities

For decisions involving major products or

processes when resource spending and

activities are greatly mismatched, averaging

higher level activity costs can lead tomisinformation


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H

IGH

ER LEVEL RESO

URCES

Extreme product complexity and diversity

may justify averaging resource costs acrossactivity levels in order to ease the

managers decision making burden.


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CONDENSING THE

ACTIVITY LIST

Complete activity list provide informationfor process improvement.

For product costing purposes it is more

convenient to to condense the activity list

according to common cost driver bases.


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BENEF

ITSOF

ABC

Provides information to measure

Product profitability

Customer profitability

Cost of new products or services


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ACTIVITY BASED

MANAGEMENTActivities

Value added Non-value added

Enhances the Do not add to

value of the customer-perceived

product in the value

eyes of customers


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THANKS

13813 activity based costing

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