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061010_Approach for Realizing Profit Potential Using Activity Based Costing

061010_Approach for Realizing Profit Potential Using Activity Based Costing

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05/09/2014

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Approach for Realizing Profit Potential using Activity Based Costing

The purpose of this note is to articulate the approach proposed to be taken in order to
realize the hidden profit potential for an organization by making the right choices about
the customers it serves, the products / and services it delivers and the making the right
decisions on price / delivery plans.

Data Gathering Phase

\ue000Study of the Profit & Loss A/c and the associated schedules
\ue000List of Products / Services
\ue000Manufacturing process / service delivery process
\ue000Study of key facilities in the organization, rated capacity, actual capacity, average

set-up time and the manufacturing schedule for the previous period
\ue000Wastage / rejection / rework at different stages of manufacturing process
Facility Costing / Product Costing

\ue000Allocate direct material and direct labor to the products directly
\ue000Identify drivers for the key overhead costs / cost components
\ue000Allocate overheads to the machines / facilities based on their usage of overhead

resources
\ue000Arrive at machine hour rate for each of the machines by dividing the allocated
costs with the \u201cmachine run time + setup time\u201d or \u201cmachine runtime\u201d depending
of the nature of resource consumption
\ue000Allocate overhead costs to the products based on the time spent by individual
product on a facility.
Identify Core costs
\ue000Calculate direct material costs at 0% wastage and rejection
\ue000Calculate machine hour rate at machine rated capacity at current production
schedule
\ue000Calculate machine hour rate at machine rated capacity with zero set-up time and
current production level
\ue000Calculate machine hour rate at machine rated capacity with zero set-up time and
100 % capacity utilization
\ue000Translate the machine hour rates to product costs
Gap Analysis
Identify and prioritize gaps in costs associated with:

\ue000wastage / rejection
\ue000lower than rated capacity realization
\ue000frequent set-up changes
\ue000lower capacity utilization

Recommendations and Implementation
Identify alternatives and implement actions along the following lines:

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