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Activity Based Costing
Activity-based costing (ABC) is a technique to more accurately assign the ind...
From Mahabub Alam
1
From nirajrampuria
25437446.doc
ACCORDING TO AMERICAN ACCOUNTING ASSOCIATION
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Cost is a forgoing, measured in monetary terms, incurredor potentially to be incurred to achieve a specific objective.
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Each modification implies a certain attribute
which isimportant in computing and measuring the cost which is toserve the management levels in achieving their basicobjectives of planning and control.
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It is a fundamental axiom that a cost must be understoodin its relationship to the aims or purposes which it is toserve.
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To discover opportunities for cost improvement.
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To prepare and actualize a business plan.
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To improve strategic decision making.1.Direct costing.2.Traditional costing.3.Activity based costing ABC.ABC was first clearly defined in 1987 by Roberts Kaplan andW.Bruns. They initially focused on manufacturing industrywhere increasing technology and productivity improvementshave reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect cost. For Example, Increased automation has reducedlabor, which is a direct cost, but has increased depreciation,which is an indirect cost.
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25437446.doc
DEFINITION OF ACTIVITY-BASED COSTING“
A method of measuring the cost and performance of activities and cost objects.”
DETIALS ABOUT ABC SYSTEM:-
Activity based costing (ABC) is a costing method that isdesigned to provide managers with cost information forstrategic and other decisions that potentially affect capacityand therefore fixed costs. Activity based costing is ordinarilyused as a supplement to rather than as a replacement for thecompanies usual costing system. Most organization that useactivity based costing have two costing system the officialcosting system that is used for preparing external financialreports and the activity based costing system that is used forinternal decision making and for managing activities.
IN ACTIVITY-BASED COSTING SYSTEM:
1.Non-manufacturing as well as manufacturing costs maybe assigned to product.2.Some manufacturing costs may be excluded fromproduct cost.3.A number of over head cost pools are used, each of which is allocated to product and other costing objectsusing its own unique measure of activity.4.The allocation bases often differ from those used intraditional costing systems,5.The overhead rates, or activity rates, may be based onthe level of activity at capacity rather than on thebudgeted level of activity.You cannot compete or even begin to compare until you knowhow to cost. ABC is a cost accounting methodology that canprovide definitions of processed, identify what the cost driversof those processes are, determine the unit costs of various
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products and services, and create various reports on agencycomponents that can be utilized to generate activity orperformance based budgets.A major advantage of using ABC is that is avoids or minimizesdistortions in product costing that result from arbitraryallocations of indirect costs. Unlike more traditional line itembudgets which cannot be tied to specific outputs, ABCgenerates useful information on how money is being spent, if a department is being cost effective, and how to benchmark(or compare oneself against others) for quality improvements.Activity based costing also provides a clear metric forimprovement. It encourages management to evaluate theefficiency and cost effectiveness of program activities. SomeABC systems rank activities by the degree to which they addvalue to the organization or its outputs. This helps managersidentify what activities are really value added those that willbest accomplish a mission, deliver a service, or meetcustomer demand thus improving decision making throughbetter information, and helping to eliminate waste byencouraging employees to look at all costs. That is why anessential aspect of any ABC endeavor is to get a clear pictureof the activities a business area performs, when employeesunderstand the activities they perform, they can betterunderstand the costs involved.Up to this point in managerial accounting we have discussedproduct costing systems primarily designed to provide unitproduct cost information for financial statement purposes.These systems use actual direct material cost, actual directlabor cost, and a volume based allocation rate to applyoverhead to cost products. Overhead is applied based on apredetermined overhead rate calculated by dividing totalestimated manufacturing over head by some volumeallocation base such as direct labor hours or machine hours.Now we are going to study a new costing system, activitybased costing. Note that ABC will not take the place of thefinancial statement costing system but will be used as asupplemental costing system for management purpose.
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Activity Based Coting Examples
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| Upload Date: | 11/25/2009 |
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