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Activity Based Costing

Activity Based Costing

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This presentation is all about the detailed activity based costing...
This presentation is all about the detailed activity based costing...

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Published by: Khawaja Naveed Haider on Dec 24, 2009
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12/09/2014

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TOPIC

ACTIVITY BASE COSTING
PRESENTED TO:
PROF. TAHIR MEHMOOD

PRESENTED BY:
IRAM MAQBOOL(090445-003)

DEFINITION OF ABC
Activity base costing (ABC) involves the identification of the factors (cost drivers) which causes the cost of an organisation's major activities, support overheads are charge to the product on the basis of their usage.

COST DRIVER

A cost driver is a factor which causes a change in the cost of an activity.

STEPS INVOLVES IN ABC
 Identify major activities.  Identify the factors (cost drivers).  Calculate the pool rate.  Charge cost to product.

EXAMPLE
The controller of Waleed manufacturing co. has establish the following activity cost pool and cost drivers.

Activity cost pool

Overhead cost

Cost drivers Budgeted level for cost drivers
250 75,000 litters 2,000

Machine setup Rs.500,000 No. of setup Material handling Quality control 150,000Weight of raw material 150,000No. of inspections

EXAMPLE CONT….
An order of 2000 boxes of film development chemical has the following production requirement. machine setup: 10 setup raw material: 20,000 litters inspections: 20 inspections Calculate pool rate and cost assigned to product.

SOLUTION:
Activity (1) Drivers (2) Machine No. of setup setup
Material handling Quality control

Pool rate (3)

Overhead cost (4)

(500000/250) (2000 x 10) = Rs.2,000setup = 20,000

Weight of raw (150000/75000) (2 x 20000) material = Rs. 2 / litter = 40,000 No. of inspections

(150000/2000) (75 x 20) =Rs.75 / insp.

= 1,500

Total Unit cost

Rs. 61,500
61500/2000 =30.75

ABC VS TRADITIONAL COSTING
TRADITIONAL
• COMMONLY TWO BASIS • LESS ACCURATE • SMALL ORGANISATION

ABC
MANY COST DRIVERS MORE ACCURATE LARGER ORGANISAION

EFFECTS OF ABC
 PRICING

 DECISION MAKING

PRICING

The leaders of most organizations more likely to use realistic cost allocation methodology (ABC), when they take pricing decision.

DECISION MAKING
• Give accurate and reliable cost information. • Establish a long-run product cost. • Provide data which can be used to evaluate different ways of delivering businesses.

THANKS

ANY QUESTION

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