project report | Resource | Profit (Accounting)

“Activity Based Costing as a measure of improving the cost structure at Akash industries”

INDEX
Sr.No. 1 2 3 4 5 6 7 8 10 11 12 13 14 CONTENTS Executive summary Industry Profile Organization profile History of Akash Industries Company at a glance Research Methodology Data Collection Conceptual Framework Analysis Findings Suggestions Conclusion Bibliography Page No.

1-2 3-5 6-8 9-12 13-18 19-21 22-23 24-33 34-57 58-59 60-61
62-63 64-65

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“Activity Based Costing as a measure of improving the cost structure at Akash industries”

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

A study report on “ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING THE COST STRUCTURE OF AKASH INDUSTRIES”, a project undertaken at AKASH INDUSTRIES BELGAUM.

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“Activity Based Costing as a measure of improving the cost structure at Akash industries” Activity-Based Costing (ABC) represents an alternative paradigm to traditional cost accounting system and it often provides more accurate cost information for decision making such as product pricing, product mix, and make-or buy decisions. ABC models the causal relationships between products and the resources used in their production and traces the cost of products according to the activities through the use of appropriate cost drivers. In this project, the costing system followed by Akash Industries is compared with ABC in terms of the effects on the product costs that are carried out to highlight the difference between two costing methodologies. By using this methodology, a valuable insight into the factors that cause the cost is provided, helping to better manage the activities of the company. According to the study, Akash Industries follows traditional method for costing that assigns overheads directly to the product. Cost of the product UC Range series 4 end cover is found out by Activity Based costing and is compared with the traditional method followed by Akash Industries to arrive at the cost of the above product. The study states that the product is being over cost by the company. Akash Industries should go for Activity Based costing as it understands true profitability of the customers, products, or services and also helps in identifying areas where the cost can be reduced or efficiencies can be increased.

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Babasabpatilfreeppt.“Activity Based Costing as a measure of improving the cost structure at Akash industries” INDUSTRY PROFILE INDUSTRY PROFILE Manufacturing Industry Manufacturing industry refers to those industries which involve in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition.com 4 .

electronics industries. is among the fastest growing and has seen more investments as a proportion of gross domestic product than any country except China. Despite the fact that China is ranked fourth in the manufacturing productivity. Manufacturing industry analysis also suggests that in some countries like China. etc. Also needed are professionals well versed in the technological know how. metalworking industries. The Government has taken several initiatives to accelerate growth in this sector and improve competitiveness of Indian industry in general and manufacturing in particular. Manufacturing industries are broadly categorized into engineering industries. food processing etc. The final products can either serve as a finished good for sale to customers or as intermediate goods used in the production process. technological know how has to be developed. chemical industries. India’s manufacturing base. due to technological lacunae. textiles. Babasabpatilfreeppt. plastic industries. • Industrial infrastructure up gradation programmes on cluster basis. The cost of letting such industries flourish may even exceed the benefits generated by them. construction industries. which is the fourth-largest among emerging economies. food and beverage industries. These industries use various technologies and methods widely known as manufacturing process management. Employment opportunities in the manufacturing industry have declined comparatively. However.com 5 . Manufacturing industries are important for an economy as they employ a huge share of the labor force and produce materials required by sectors of strategic importance such as national infrastructure and defense. not all manufacturing industries are beneficial to the nation as some of them generate negative externalities with huge social costs.“Activity Based Costing as a measure of improving the cost structure at Akash industries” The manufacturing industry accounts for a significant share of the industrial sector in developed countries. energy industries. Manufacturing industries are the chief wealth producing sectors of an economy. it is not being able to compete in the world market. • Technology up gradation schemes for various sectors such as small scale industries. textile industries..

duty Babasabpatilfreeppt.com 6 . • Encouragement to foreign technology collaborations and liberalization of FDI in manufacturing activities.“Activity Based Costing as a measure of improving the cost structure at Akash industries” • Easier access to inputs at competitive prices and rationalization and reduction in rates.

Babasabpatilfreeppt. it has grown into a big organization with a focus in quality in everything.com 7 . Ever since. a pioneer in the manufacture of sheet metal pressed components was established in the year 1977.“Activity Based Costing as a measure of improving the cost structure at Akash industries” ORGANIZATION PROFILE ORGANIZATIONAL PROFILE Akash Industries.

80T. The separate tool maintenance area to carry out maintenance of tool is provided with surface grinding & drilling machines to attend immediate rectification. shearing machine of capacity 3. Akash Industries are in it for a long haul with a focus on continual improvement. tools is designed for the components as per the customer requirements. The painting facility with 7 tank process of components before painting is available. Some of our esteemed clients are as under:• • • • • Cummins Generator Technologies OTIS Elevator (I) Ltd. Crompton Greaves Ltd Kaytee Switch Gears Ltd. elevator. They also use triple acting arrangement for some of these machines to carryout more precision items & to make multiple operations at a time. grinding.com 8 . Trident Power craft Pvt.known in the global industrial community. Ltd. home appliances automobile industry and the defense. 160T & 250T hydraulic presses are double acting presses to carry out deep drawing operations. out of which 50T. Akash Industry have the pride to have clients from various industries many of them are well . Their specialty being the deep drawn components. spot welding. The painting booth & drier for quick drying is also installed to give our customers a complete satisfaction by supplying ready for fitment components. They are having mechanical presses ranging from 10T to 80T capacity & hydraulic presses ranging from 10T to 250T capacity. Apart from this.“Activity Based Costing as a measure of improving the cost structure at Akash industries” An ISO 9001-2000 Company with a good customer base in the domestic as well as the International market activities of Akash Industries include tool design also with a highly skilled & professional work force. The other relevant machineries such as welding transformers. They are equipped with 62 KVA generators to overcome power failure. such as sharpening of punches & dies. they cater the electrical.0mm x 2500mm & 10mm x 2000mm both hydraulically operated are installed for better cutting accuracy. and circle cutting machines are installed to support our manufacturing activity with maximum productivity. The two material handling equipments for loading & unloading of tools are in place to make setting faster and easier. Babasabpatilfreeppt.

com 9 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” • IFB India Babasabpatilfreeppt.

Then he served at Hyderabad Tool Pvt. DHARWAR (NTTF). Industrial Estate. Belgaum – 590 008 Mr.com 10 . Ltd. as a highly skilled Mechanic for a period of Babasabpatilfreeppt. Sadanand T Macha completed his DIPLOMA IN TOOL AND DIE MAKING from NETTUR TECHNICAL TRAINING FOUNDATION. Udyambag.“Activity Based Costing as a measure of improving the cost structure at Akash industries” HISTORY OF AKASH INDUSTRIES HISTORY OF AKASH INDUSTRIES Akash Industries M-15. Hyderabad.

By this time 6 months had passed. It was at this time that Shri A G Tembe. But since they had no shed or own machinery they could not approach the engineering companies. He started working under Mr. brother in law. Initially it was only fabrication work that they used to carry out. Here they prolonged their business for 2 years supplying maintenance jobs. from Purchases. Initially.they went on to purchase a wielding machine and started in their own garage at Angol ‘C’ scheme. Even to approach somebody for work. Bangalore & Hubli. they felt that they should better join any service. Pusalkar Engineers. through the help of Late Shri N A Hanamannavar. gave them shelter in his shed at Industrial estate.e. Ltd. Doing fabrication work and even if necessary they used to carry the wielding machine to customers place and carry out the work. in the year 1979. But with this type of work it was impossible for both of them to meet their ends. Inamdar’s. Having gained the experience and he left M/s Pusalkar Engineers. they got an Industrial Plot of 10 Guntas from KSSIDC LTD. Inamdar who was married and had 3 childrens. Months passed by and they felt that how they can ever survive with this little earning. They really had a tough time and a tougher time to Mr. Meanwhile Shri V B Inamdar also left M/s Pusalkar Engineers and they both decided to start their own business. They had neither place nor financial support. they didn’t had the requisite finance. V B Inamdar (Present Partner). Belgaum and was idle for 2 to 3 months. Etc for a period of one and half yeaRs.“Activity Based Costing as a measure of improving the cost structure at Akash industries” one and half years. Inspection and Despatch. the then Chairman of the City Babasabpatilfreeppt. With a mere Rs. Their major problem was finance and how to expand their engineering activities was a big question mark for them. which they used to get the things from their fellow industrialists and supply the same. It was even difficult for them to go by bus and many a times they used to travel by truck to Dandeli. This continued for a year and half. 3000/. finish their work and again return back to Belgaum. Meanwhile. With the help of Mr. Production. by some means with hardly a few chips in their pockets. of M/s Ohm Electricals. they gave them maintenance jobs. Because of the climatic conditions he left Hyderabad and came back to Belgaum and joined M/s. they could get an entry. In the year 1977..com 11 . they both started their own business in the name of M/s Akash Industries. It was here that he learnt i. However. who was working in West Coast Paper Mills Limited Dandeli. In M/s Pusalkar Engineers he came in contact with M/s Kirloskar Electric Co. Belgaum.

which are used by the Police Department during Anti Riots. AHMEDNAGAR. They proved themselves by quality and delivery. PUNE for supplying of Aluminum Cartridge cases purely an import substitute. Capacity reached a saturated point and they were not in position to meet their high demands and they had to add some higher capacity of Hydraulic Presses converting the same into double acting and triple acting. They approached State Bank Of India for financial assistance and it was at this juncture that they really helped them to construct their own shed and purchase of machinery. In the year 1988. These cartridge cases are used to make Anti Riot Rubber Bullets. HBL PEENYA & PUNE. AUTOMOBILE CORPORATION OF GOA LTD. they could get a good amount of workload.com 12 . Here their basic activity was only to manufacture Pole bricks of different capacities for alternators. BANGALORE and M/s LARSEN & TOUBRO LTD. they started another partnership concern in the name of M/S KARNATAKA METAL PRESSING just near to their existing concern taking Mr. their line of activity was only Sheet Metal Components. S K Yatgeri as additional partners. With the vast experience of Mr. V B Inamdar. I. Babasabpatilfreeppt.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Improvement Board. Motor. They approached M/s CROMPTON GREAVES LTD. This was their biggest achievement that they had in their last 29 years. Their Working capital of Rs. Automobile Parts and items required by customers to their required specifications. In a span of two to three years their business increased multifold. BANGALORE. In the year 1984. Having got confidence.000 was also sanctioned. AKASH INDUSTRIES major activities are manufacturing of Sheet Metal Pressed Components for Alternator. They approached M/s KIRLOSKAR ELECTRIC COMPANY LIMITED. At present their turnover stands at Rs 45 Lakh per month. More and more work started coming in and somehow they had to meet their urgency with having only few machines. This increased their supply position. they got an order from M/s AMMUNITION FACTORY. they expanded their own shed and added few more machines of a higher capacity. P A Bagewadi and Mr. Since.e of more than 15 years and his previous contacts. For this special purpose machines were acquired with the most accurate toolings and precious inspection equipments to meet their highest accuracy and quality. 10. KIRLOSKAR ELECTRIC CO.

“Our aim is to do sincere and hard work giving more attention to quality and delivery. S T Macha “This is all due to hard and sincere work and the backing of our fellow industrialists who have supported us in all our difficult times”.“Activity Based Costing as a measure of improving the cost structure at Akash industries” In the words of Mr. Babasabpatilfreeppt.com 13 . This is what every one wants in this world of competition”.

Belgaum – 590 008 Partners : S.“Activity Based Costing as a measure of improving the cost structure at Akash industries” COMPANY PROFILE COMPANY PROFILE Name of the Organization Type of Industry Address : Akash Industries : Manufacturing Industry. : Akash Industries M-15.B Inamdar M. Industrial Estate.V Inamdar Babasabpatilfreeppt. Udyambag.com 14 .T Macha V.

To meet customers requirement and strive to exceed customer expectations.81 : 50 QUALITY POLICY AT AKASH INDUSTRIES 1.876. Manage all activities and related resources as a process.333. 4. Babasabpatilfreeppt. 3.com 15 . Involve all our suppliers in quality improvement process as to ensure mutually beneficial and long time relationship. 5.S Macha Established Size and nature of the company : 1977 : Sales FY08-09 Employees : Rs48. Take decisions and implement necessary actions based upon analysis of data and information.“Activity Based Costing as a measure of improving the cost structure at Akash industries” A. 2. Create and maintain an environment in which personnel are fully involved in achieving organization objectives so as to ensure continual improvement and growth.

com 16 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” ORGANIZATION CHART Babasabpatilfreeppt.

com 17 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” Managing partner 1 Managing partner 2 In charge QA/QC Shop Incharge Chief Accountant Incharge Excise Management Representative Incharge Sales Tax Cashier Deputy Management Representative Plant Supervisor 1 Plant supervisor 2 In charge stores Workers PRODUCTS MANUFACTURED BY AKASH INDUSTRIES Babasabpatilfreeppt.

with thickness of material varying from 1 mm CRCA to 8mm H. specialization being deep drawn components using C. elevators & home appliances. They are catering at present the industries like electrical. & H.R.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Components are manufactured as per the customer requirements.R.R. LIST OF CUSTOMERS Babasabpatilfreeppt. as the raw material.com 18 .

Hubli  Mallik Engineering . USA  ABB Ltd. India  Trident Power craft Pvt. Bangalore  Telco Construction Equipment.“Activity Based Costing as a measure of improving the cost structure at Akash industries”  Cummins Generator Technologies. Hubli  Kirloskar Electric co.com 19 .Ltd. U. Dharwad Babasabpatilfreeppt. Mexico  Fasco Motors. Bangalore  OITS Elevator company.K  Cummins Generator Technologies. India  Motorsense.

com 20 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” RESEARCH METHODOLOGY RESEARCH METHODOLOGY Babasabpatilfreeppt.

com 21 . To compare existing costing method followed by Akash Industries with Activity Based Costing. To identify cost of the activities involved in manufacturing the product UC Range series 4 end cover. Objectives of the study: • • • • • • • To study the functions and operations of the organization To know and understand the existing costing method followed by Akash Industries. To identify activities involved in manufacturing of UC Range series 4 end cover.“Activity Based Costing as a measure of improving the cost structure at Akash industries” The Study: The present study is an attempt to understand and ascertain the costing method followed in Akash Industries and to compare it with the costing method Activity Based Costing. Thus this project study conducted to integrate theoretical and practical aspects of Activity based costing in the organization. To allocate the cost for the activities. To find the cost per unit of the product UC Range series 4 end cover. Hence the field study becomes as essential part of the curriculum. DATA COLLECTION • Primary Data Babasabpatilfreeppt. Scope of the study: The scope of this study is to know and understanding the various processes and activities involved in manufacturing Industries especially in AKASH INDUSTRIES. It involves finding out the cost per unit of the product UC Range series 4 end cover by following Activity based Costing. Need for the study: The theoretical aspects of ACTIVITY BASED COSTING provide the framework of the study. A conceptual and the practical approach is the need of the hour.

 Frequent discussions were made with other employees of the company. Babasabpatilfreeppt. In order to maintain confidentiality some information could not be disclosed by Akash Industries.  Much of the information was collected from the cost accountant of Akash Industries (Mr. • Secondary Data Secondary data was collected through last year’s balance sheet of Books on cost accounting were referred. Company website  Akash Industries.Sunil Kundap) .“Activity Based Costing as a measure of improving the cost structure at Akash industries” Following are the sources of primary data collected.  Met few senior level executive of the firm.com 22 .   Limitations of the study: • • The study is limited to AKASH INDUSTRIES only.

com 23 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” CONCEPTUAL FRAMEWORK ACTIVITY BASED COSTING Activity Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the Babasabpatilfreeppt.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” organization without regard to the organizational structure. Babasabpatilfreeppt. services. a manufacturer produces products. and services. The basis of Activity Based Costing is look at the activities required to produce the cost of the product or service. a council delivers services. Concept of Activity-Based-Costing: An organization performs activities to do its business. The goal is to measure and then price out all the resources used for activities that support the production and delivery of products and services to customers. The activities consume resources and the cost of these can be calculated. an accounting firm prepares tax returns. people. products. and customers. The goal of ABC is not to allocate common costs to products. All activities consume resources. business processes. These activities define the kind of business you are in: a ship owner has an activity to unpack boats. It is the consumption of these resources that adds to overhead costs. The amount of activity required for each product and service is determined. equipment. What's what in ABC? • • The activity is the work that is done. The resource is what the activity uses to do the work e. ABC systems recognize that many organizational resources are required not for physical production of units of product but to provide a broad array of support activities that enable a variety of products and services to be produced for a diverse group of customers. Resources cost money. hence the real cost can be determined.g. It is developed to provide moreaccurate ways of assigning the costs of indirect and support resources to activities. a university teaches students.com 24 .

The cost driver for an activity is the factor that influences the amount of the resources that will be consumed by this activity. service. The costs of this activity include the truck drivers' wages. fuel. hence the cost of the delivery activity should be assigned to each product on the basis of the number of deliveries each uses. It is the activities that cost money. The quantities of the resources that will be consumed by this activity are influenced by the number of deliveries made per year. process. With ABC the products consume the activities.“Activity Based Costing as a measure of improving the cost structure at Akash industries” • The cost of the activity depends on the quantity of resources used to accomplish the activity. It could be a product. or services Babasabpatilfreeppt.  Understand true profitability of your customers. • • The activity driver measures how much of the activity is used by the cost object. Hence the cost driver could be the number of deliveries. Example: Product A is delivered once a month. A cost driver is designed to allocate the delivery activity cost pool to the cost objects. Example: the activity is delivering goods. Products A and B require a different number of deliveries. ABC traces overhead costs by looking at the activities that each product and service calls upon. depreciation of the truck. • The cost object is whatever it is you wish to cost. products. insurance. Why use Activity-Based-Costing? Activity-Based-Costing is necessary for the following reasons. job or customer. While traditional costing arbitrarily allocates overhead costs.com 25 . whereas product B is delivered once a week. etc.

often in order to set selling prices. there are no absolutes in determining Babasabpatilfreeppt. with serious consequences for a business competitive stance. the idea of selling prices based on costs is dangerous.“Activity Based Costing as a measure of improving the cost structure at Akash industries”  Quantify the cost of non-value added activities such as errors and reworks  Identify opportunities to reduce costs and/or increase efficiency  Obtain actionable information to negotiate price increases for unprofitable clients  Stratify overhead costs so they can be managed more effectively.com 26 . With the variety of conventions and concepts used in cost determination. The ABC framework Activity based costing has been claimed as a method of arriving at more accurate costs. In a market economy.

processes.“Activity Based Costing as a measure of improving the cost structure at Akash industries” product costs. Activity Based Costing is a methodology for understanding the activities. hence the objective of accurate costs is diluted. the technique of ABC is being seen more as a cost-distortion alarm. more as a cost management tool.com 27 . services and products of a business. The Elements of ABC can be described in the following model: The ABC CROSS: COST ASSIGNMENT VIEW RESOURCES RESOURCE DRIVERS PERFORMANCE MEASURES COST DRIVERS ACTIVITY DRIVERS ACTIVITIES OBJECTS OF WORK Resource Drivers are the link between resources and activities assigning cost form the financial statements. Babasabpatilfreeppt. more as an attention directing tool. understanding what drives the cost of these activities and processes. However. and thus reducing the non-value-adding activities/processes.

for instance.com 28 . Electricity. activities involved in manufacturing etc. a product. ABC categorizes the activities into: Unit level activities:  Performed each time a unit is produced. Product Configuration and Exploiting Value Chain Linkages. Experience. Technology and Complexity. The Structural Cost Drivers are viz. Cost Drivers are factors that cause changes in the performance of activities and create increased consumption of resource. Fundamentally there are two types of Cost Drivers. Activities comprise of units or work or task. a satisfied customer/client.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Activity Driver is the factor used to assign cost from an activity to a object of work. For example purchase of raw materials. Scale. Babasabpatilfreeppt. Scope. Work Force Involvement. Plant Layout. Capacity Utilization. The Exceptional Cost Drivers are viz. Object of Work is the specific objective at the end of a process. if making a sales call is the activity then the frequency of sales calls to a specific customer/client would be the activity driver. for instance. Total Quality Management.

set up resources. direct labour. These costs are deducted lump sum from operating margins of all product lines. Direct materials. plant maintenance. E.“Activity Based Costing as a measure of improving the cost structure at Akash industries”   Consumed in direct proportion to the number of units produced.    ABC establishes inputs and outputs to and from each activity. accounting. designing the product. Administration. Consumption varies with the variety of products/services and the stage of the Product Life Cycle the products/services are in. purchasing resources. E. E.g. Product sustaining activities:  Performed to support and sustain different products/services on the product life cycle.g.g.com 29 .g. These are generally fixed for a certain scale/scope of operations over a period of time. Fixed for all units within a batch. Energy costs. etc. Hierarchy of Activities and Activity based profitability analysis Babasabpatilfreeppt.   Facility sustaining activities:  Performed for supporting the happening of the above three types of activities and providing the platform/infrastructure. Consumed in direct proportion the number of batches produced. Batch related activities:     Performed each time a batch of goods is produced. E. etc. Inputs to one activity may be outputs from another and there could also be interactive relationships among activities.

inspection) = batch – level contribution (Process engineering. STAGES OR STEPS INVOLVED IN ACTIVITY BASED COSTING. Product line contribution helps in product line decisions. product specifications. etc. purchase orders.. Customer level contribution helps in customer and market related decisions.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Sales Revenue Less: Unit-level products cost (Material. rent . Facility sustaining cost are period cost are period which are fixed in nature. Other identifiable costs) = unit level contribution (Sets-ups.) = net profit Less: Consumer and market related costs Less: Facility sustaining cost Less: Product line costs Less: Batch related costs Note: Unit level and batch contribution analysis facilitate short-term decision relating to products and complexity analysis. and taxes. Babasabpatilfreeppt. Power Costs. rates.com 30 . order change notices) = = product line contribution customer level contribution (Plant management . material movements.

c) For example. identification of suppliers. a) Activity cost drivers used to relate the overheads collected in the cost pools to cost objects should be determined. Step 3: Apportion the cost to support activities over the primary activities on suitable basis. c) All costs will be identified under the activities. in production scheduling. the driver will be the number of batches ordered. b) This is based on the factor that drives the consumption of the activity. Activities comprise of units of work or task. resource cost drivers will be used. Step 4: Determine the activity cost drivers for activity/cost pools. b) Cost of support activities are spread over to primary activities to collect costs only under them. Step 5: Calculate Activity cost driver rate = Total cost of activity Activity cost driver Babasabpatilfreeppt. c) The base is the cost driver which is the measure of how the support activities are used.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Step 1: Identify the various activities within the organization. Step 2: Relate the overheads to the activity using resource cost drivers a) Over heads will be related to support and primary activities. For example purchase of material is an activity consisting of series of task like purchase requisition. follow up etc. issuing purchase orders.com 31 . inviting quotations. advertisement. b) For this purpose. thus creating activity cost pools. a) This is very much like reapportionment of service department expenses to production departments.

com 32 . c) This rate can be used to ascertain cost of the product (as in traditional absorption costing) and to ascertain cost of other cost objects such as customers/customer segments and distribution channels. b) The rates will be multiplied by the different amounts of each activity that each product/other cost object consumes so as to ascertain its cost. Babasabpatilfreeppt.“Activity Based Costing as a measure of improving the cost structure at Akash industries” a) Activity cost driver rates are computed for each activity.

Better understanding overheads.“Activity Based Costing as a measure of improving the cost structure at Akash industries” ACTIVITY BASED COSTING ADVANTAGES • • • • • • • • • More accurate costing of products/services. Babasabpatilfreeppt. Makes visible waste and non-value added. distribution channels. Makes waste visible which some executives and managers don't want their boss to see. implementing and maintaining activity based system. Cost of buying. supply chains.com 33 . Utilizes unit cost rather than just total cost. Enables costing of processes. Easier to understand for everyone. customers. and value streams Activity Based Costing mirrors way work is done Facilitates benchmarking. Integrates well with Six Sigma and other continuous improvement programs. ACTIVITY BASED COSTING DISADVANTAGES • • • More time consuming to collect data.

the cost of lower volume products are often understated. ABC provides managers with a clearer picture of cost of processes and the profitability of customers and products. By moving away from traditional cost allocation methods and using improved ABC methods of tracing and assignment.“Activity Based Costing as a measure of improving the cost structure at Akash industries” How does Activity Based Costing differ from traditional cost accounting systems? Most traditional costing systems utilize a single basis. ABC assigns costs to activities and products based on how the costs (resources) are actually consumed by the process or product. Often products which have high volume (and high labor cost) are over costed. (e. direct labor) to distribute the indirect costs to all products and services. This method of allocating indirect costs commonly results in erroneous cost data. Likewise. Rather than relying on a single basis to distribute costs.g.com 34 . and many of the indirect costs of these products are overlooked. Babasabpatilfreeppt.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” ANALYSIS DETAILS OF THE PRODUCT Babasabpatilfreeppt.com 35 .

6) Weight of a Cover 7) Gross Material cost per unit 8) Process Generated Scrap 9) Scrap rate = 30kg/21 =1.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Product name: UC Range series 4 end cover Raw Material Requirements for the product 1) Metal sheet of length 1250*2500*1.1/Cover =0.1– 6. 5) Cost of sheet metal per kg 37Rs.5 11) Net material cost = 78.5 = Rs71. 4) Sheets required to prepare 1000 units is 48sheets.65 x 10 COSTING FOLLOWED BY THE COMPANY Product: UC Range series 4 end cover Number of units produced = 300000 Covers p.42 x Rs55 = Rs78.6 10) Revenue generated from scrap = 0.65 kgs =Rs12/kg = Rs 6.2mm 2) Weight of the sheet is 30kg 3) 21 Covers can be prepared from one metal sheet.42kg = 1.a Babasabpatilfreeppt.com 36 .

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Particulars Total cost(in Rs) Cost/unit (in Rs) Babasabpatilfreeppt.com 37 .

33.6 161.029 8.83.78 1 52.82.32.338 14.com 38 .147 2.73.205 3.410 1.86.757 1.50 17.73.70.81.964 27.52.65.30.255 18.069 69.929 5.646 7.480 5.97.1 CALCULATION OF COST PER UNIT BY ACTIVITY BASED COSTING 1) Purchase of Raw material Babasabpatilfreeppt.91.203 10.88.28 6.573 45.750 4.809 2.48 21.347 84.273 123.000 72.87 6 143.45.095 1.095 4.60.58.500 4.532 14.04.93.619 5.75.59.853 3.918 18.235 56.61.360 7.4 31.“Activity Based Costing as a measure of improving the cost structure at Akash industries” DIRECT COST Direct Material (Raw Material Consumed) Direct Wages Direct Expenses Prime Cost FACTORY OVERHEADS fuel oil & lubricant Depreciation on machinery Repairs and maintenance Insurance Rates and Taxes Indirect material Factory cost ADMINISTRATIVE OVERHEADS Printing and stationary Postage and telegram Newspapers and magazines Professional charges Office furniture Leave with wages Telephone expenses Salary to partners Vehicle maintenance Sundry expenses Salary to staff Cost Of Goods Sold SELLING AND DISTRIBUTION Advertisement expenses Traveling expenses Sales Promotion expenses Packing charges Cost Of Sales PROFIT SALES 3.266 3.05.

00 Activity Purchase Sub Activity Raw material transport Loading and unloading Storage Material cost Cost Driver Weight of product Weight of product Weight of product Weight of product Therefore charges per unit Cost of per cover = Rs600/5000kgs = Rs0.600.00 = Rs1500/5000kgs = Rs0.42 x Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” a) Raw material transport charges : Weight of the goods 5000kgs (for the specified component) of sheet metal Delivered from R.1704/cover b) Loading and unloading Charges 5 Ton x Rs300 Therefore charges for per unit Cost per cover = Rs300.com 39 .20/kg =1.00/.284/cover c) Storage charges Rent 20000/month Building area Storage Cost Storage cost per day = space required 10 x 5ft = 10000sq ft =50sq ft x Rs2.12/kg =1.12 =Rs0.m =Rs100/26Days Babasabpatilfreeppt.00 =Rs100.p.00/ton = Rs1500.C Nagar Belgaum to Akash industries Belgaum = Rs.42kg x Rs0.20 =Rs0.

56.72/cover Rs95.22– Rs6.84/day Storage cost per Cover =Rs3.400/3521 Covers =Rs101.400 =5000kgs/1.00384/cover Rs 94.00384/cover d) Material cost = 5000kgs x Rs 71.56.“Activity Based Costing as a measure of improving the cost structure at Akash industries” =Rs3.284/cover Rs0.72/cover Total cost incurred for purchase of raw material Activity Purchase Sub Activity Raw material transport Loading and unloading Storage Material cost Total Cost Rs0.5 =Rs94.22 – scrap =Rs101.84/1000Covers =Rs0.1704/cover Rs0.17 2) Manufacturing cost Babasabpatilfreeppt.42wt per kg =3521 Covers =Rs3.28 (exclusive of transport and loading and unloading charges) = Rs3.com 40 .

9/Cover rate b) Machine cover rate =cost of machine x depreciation =Rs500000 x 10% depreciation =Rs50000 p.5 50 sq ft Combination of man and machine hour Combination of man and 800000 7 machine hour 100sq ft 80sq ft 50 sq ft Shearing Circle cutting Deep drawing Trimming Piercing 3 1 300/wor ker 150 2 150 &135 Rs 2 1 1 150 150 8 8 500 900 300000 400000 3 3 Rs 2 Rs 2 COST OF EACH PROCESS 1) Shearing a) Man cover rate: = wages/number of Covers = Rs900/1000Covers = 0.com 41 .6per day Babasabpatilfreeppt.a =Rs50000/300days = Rs166.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Process labor Activity Wages per day Hours Number Sub Activity of Shearing Covers Circleper 8 hrs cutting 8 1000 Deep drawing 8 800 Trimming 8 Piercing 800 Cost of Hp per Space Activity Driver Cost per sq ft Rs2 Rs 2 Manufacturing Machine machine man and Combination of occupie machine hour d by the Combination of man and machine 500000 5 machine hour 100 sq ft Combination of man and machine hour 100000 0.

266 Monthly power consumption = 45hp = 100 Sq ft x Rs 2 per sq ft Power Consumption For 5hp = Rs694.8 per hp/ month = 31.474 = Rs3474.58.61/1000 =Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” =Rs166.00 = Rs3474/26days =133.76/25machines =Rs21.6/1000Covers =Rs0.00769/Cover d) calculation of electricity Monthly electricity bill Therefore.69/1000Covers =Rs 0.m = Rs200/26days =Rs7.266/45hp = Rs694. Rs31.028 p.1336/Cover Fuel oil & lubricants = Rs1.a = Rs 158028/ 300days = Rs 526.8 x 5hp Electricity bill per month = 5hp = Rs3.61/day =133.com 42 .76/day = Rs 526.17/Cover c) Space occupied by the machine = Rs200 p.07/machine Babasabpatilfreeppt.69/day =Rs7.

1336/cover Rs0.07/1000Covers =0.9/cover Rs0.a =Rs 10000/300days =Rs33.00769/cover Rs0.33/per day =Rs33. Circle cutting a) Man cover rate =wages/number of Covers = Rs150/800Covers =Rs0.0416/Cover c) Space occupied by the machine = Rs100 p.021/Cover Total Cost of shearing activity Activity Shearing Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.17/cover Rs0.232/cover 2.com 43 = 50Sq ft x Rs 2 per sq ft .“Activity Based Costing as a measure of improving the cost structure at Akash industries” =21.1875/Cover b) Machine cover rate =Rs100000 x 10% depreciation =Rs10000 p.021/cover Rs 1.33/800Covers =Rs0.m Babasabpatilfreeppt.

026/Cover Babasabpatilfreeppt. Rs31.266/45hp = Rs694.266 Monthly power consumption = 45hp Power Consumption For 0.a = Rs 158028/ 300days = Rs 526.0167/Cover Fuel oil & lubricants = Rs1.8 per hp/ month = Rs31.76/day = Rs 526.58.com 44 .5hp = Rs694.8 x 0.36/800Covers =Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” = Rs100/26days =Rs3.4/26days =13.84/800Covers =Rs 0.4 = Rs347.07/machine =21.5hp = Rs347.5hp Electricity bill per month = 0.84/day =Rs3.07/800Covers =0.4 = Rs347.36/day =13.028 p.0048/Cover e) calculation of electricity Monthly electricity bill Therefore.76/25machines =Rs21.

a = Rs80000/300days =Rs266.com 45 = 100Sq ft x Rs 2 per sq ft .2766/cover 3.0167/cover Rs0.026/cover Rs0.333/Cover c) Space occupied by the machine = Rs200 p.67/per day =Rs266.m = Rs200/26days =Rs7.0048/cover Rs0.0416/cover Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Total Cost of circle cutting activity Activity Circle cutting Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.69/800Covers Babasabpatilfreeppt. Deep drawing a) Man hour rate =wages/number of Covers = Rs285/800Covers =Rs0.69/day =Rs7.1875/cover Rs0.67/800Covers =Rs0.3562/Cover b) Machine hour rate =Cost of machine x Depreciation =Rs800000 x 10% depreciation =Rs80000 p.

6/26days =187.58.06/800Covers =Rs0.a = Rs 158028/ 300days = Rs 526.233/Cover Fuel oil & lubricants = Rs1.06/day =187.76/day = Rs 526.8 x 7hp Electricity bill per month = 7hp = Rs4863. Rs31.07/800Covers =0.76/25machines =Rs21.026/Cover Total Cost of deep drawing activity Activity Deep Drawing Sub Activity Man cover rate Babasabpatilfreeppt.6 = Rs4863.028 p.6 = Rs4863.0096/Cover d) calculation of electricity Monthly electricity bill Therefore.3562/cover 46 .266/45hp = Rs694.07/machine =21.com Cost Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” =Rs0.8 per hp/ month = Rs31.266 Monthly power consumption = 45hp Power Consumption For 7hp = Rs694.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Rs0.3/Cover b) Machine hour rate =Cost of machine x depreciation =Rs300000 x 10% depreciation =Rs30000 p.m = Rs160/26days =Rs6.026/cover Rs 0. Trimming a) Man hour rate =Wages/number of Covers = Rs150/500Covers =Rs0.0096/cover Rs0.a = Rs30000/300days =Rs100/per day =Rs100/500Covers =Rs0.9578/cover 4.012/Cover d) calculation of electricity = 80Sq ft x Rs 2 per sq ft Babasabpatilfreeppt.15/day =Rs6.15/500Covers =Rs 0.com 47 .2/Cover c) Space occupied by the machine = Rs160 p.333/cover Rs0.233/cover Rs0.

3/cover Rs0.07/machine =21.com 48 .16/cover Babasabpatilfreeppt.028 p.266/45hp = Rs694.8 per hp/ month = Rs31.4 = Rs2084.58.4 = Rs2084.012/cover Rs0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Monthly electricity bill Monthly power consumption Therefore.76/day = Rs 526. Rs31.125/cover Rs0.8 x 3hp Electricity bill per month = 3hp = Rs2084.a = Rs 158028/ 300days = Rs 526.76/25machines =Rs21.4/26days =80.266 = 45hp Power Consumption For 3hp = Rs694.16/Cover Fuel oil & lubricants = Rs1.042/Cover Total Cost of trimming activity Activity Trimming Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Cost Rs0.07/500Covers =0.16/day =80.16/500Covers =Rs0.

m = Rs100/26days =Rs3.33/900Covers =0.84/900Covers =Rs 0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” Fuel oil & lubricants Total Rs0.0042/Cover d) calculation of electricity Monthly electricity bill Therefore.84/day =Rs3.042/cover Rs 0.a = 40000/300days =133. Piercing a) Man hour rate =Rs 150/900Covers =0.33/per day =133. Babasabpatilfreeppt.639/cover 5.com 49 = Rs31.148/Cover c) Space occupied by the machine = Rs100 p.166/Cover b) Machine hour rate =400000 x 10% depreciation =40000 p.266 Monthly power consumption = 45hp = 50Sq ft x Rs 2 per sq ft .

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Rs31,266/45hp = Rs694.8 per hp/ month

Power Consumption For 3hp = Rs694.8 x 3hp Electricity bill per month

= 3hp = Rs2084.4 = Rs2084.4 = Rs2084.4/26days =80.16/day =80.16/900Covers =Rs0.089/Cover

Fuel oil & lubricants

= Rs1,58,028 p.a = Rs 158028/ 300days = Rs 526.76/day = Rs 526.76/25machines =Rs21.07/machine =21.07/900Covers =0.023/Cover

Total Cost of piercing activity Activity Piercing Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.166/cover Rs0.148/cover Rs0.042/cover Rs0.089/cover Rs0.023/cover Rs0.468/cover

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“Activity Based Costing as a measure of improving the cost structure at Akash industries”

Activity
Manufacturing

Sub Activity
Shearing Circle cutting Deep drawing Trimming Piercing Total

Cost
Rs1.232/cover Rs0.2766/cover Rs 0.9578/cover Rs 0.639/cover Rs0.468/cover Rs3.5734/cover

Total Cost of the processes

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“Activity Based Costing as a measure of improving the cost structure at Akash industries” 3) Inspection Inspection rate 10% of number of units produced per day 1000Covers x 10% = 100Covers to be inspected 1) Salary of the inspector Time required to inspect Per day salary Per hour salary Wages to the inspector = Rs8000/month = 1 hour = Rs8000/26days =Rs307.69/day =Rs 307.69/8hRs = Rs 38.46/hr = 1hr x Rs38.46 = Rs38.46/hr

2) Cost of instruments required to inspect = Rs 8500 Expected life of instrument is one year Instruments charges per month Per day charges Per hour charges = Rs8500/12months = Rs708.33/month = Rs708.33/26 days = Rs 27.24/day = Rs27.24/8hrs = Rs3.4/hr

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375/hr Total of inspection activity Activity Inspection Sub Activity Salary of the inspector instruments required to inspect Calibration Total Cost of Per Cover Cost Rs38.4/hr Rs0. Babasabpatilfreeppt.“Activity Based Costing as a measure of improving the cost structure at Akash industries” 3) Calibration charges per year Per month charges Per day charges Per hour charges = Rs900 = Rs900/12months = Rs75/month = Rs75/26days = Rs3/day = Rs3/8hr =Rs0.23/hr Rs 0.0422/cover 4) Painting .375/hr Rs42.com 53 .46/hr Rs3.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” 1) Cost of paint and thinner Paint Rs250/ltr Thinner Rs150/ltr Divided in the ratio of 75:25 Cost of Paint Cost of Thinner Cost of mixture total = Rs250 x 75/100 =Rs 187.5 = Rs150 x 25/100 =Rs 37.72sq ft 3) Paint booth operation cost Deprecation = Rs300000 = 20% of the cost Babasabpatilfreeppt.6/Cover 2) Labour cost People required for painting Wages per day Covers painted in one day Cost per cover =2 = Rs 320 = 200 Covers = Rs320/200covers =Rs1.72 sq ft = 26Covers Cost of paint per cover =Rs225/ 26Covers = Rs8.5 + Rs37.5 = Rs225 Total Area of component covered by the mixture is 45 sq ft Area of the a component = 1.com 54 .5 = Rs187.6/cover Covers that can be painted = 45sq ft/1.

com 55 .m = Rs5000/26days = Rs192.m = 10000sq ft Babasabpatilfreeppt.a Per month Per day Cost of per covers = Rs60000/12months =Rs5000p.“Activity Based Costing as a measure of improving the cost structure at Akash industries” =Rs 300000 x 20% = Rs60000p.961/Cover 4) Power charges Rs 5500/month Total Power consumption Therefore.3/200Covers =Rs0.3/day =Rs 192. Rs5500/20hp Power consumption For 5hp Per day charges Per cover charges =Rs275per hp/month =5hp =5hp x Rs275 = Rs1375/26days = Rs53/day =Rs53/200Covers =Rs0.265/Cover =20hp Electricity bill per month for 5hp =Rs1375 5) Area of painting booth Rent Built area = 60 x 20ft = 20000 p.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Rent per sq ft Cost of area Per day charges Per cover = Rs30000/10000sq ft = Rs3/sq ft/month = 1200sq ft x Rs3 = Rs 3600 =Rs3600/26 = Rs138.46/200Covers = Rs0.00/Cover Babasabpatilfreeppt.com 56 .961 Rs0.6 Rs0.692/Cover Area of the Cover = 1.11 x 1.72sq ft Cost of per cover = Rs12.11/sq ft Rs20.72sq ft = Rs20.82/cover Total cost of painting activity Activity Painting Sub Activity Cost of paint and thinner Labour cost Paint booth operation cost Power charges Area of painting booth Total Cost of Per Cover Cost Rs8.6 Rs1.265 Rs0.46/day =Rs138. taxes) Cost of plastic wire = Re 1.692 Rs12.82/cover 5) Dispatching 1) Packing charges : Packing material required: --Cost of wooden box = Rs 3000 (inclusive transportation cost.50/Cover Cost of paper = Re1.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Number of Covers packed per box = 200 covers Rs3000 + (Re1.50 x 200) + (Re1.com 57 .00 x 200) = Rs3500 2) labour People required = 3 5 boxes packed per day Wages Wages per box Total Per Cover = Rs200 + Rs150 + Rs150 = Rs500/day = Rs500/5boxes = Rs100/box =Rs 3500 + Rs100 = Rs 3600 = Rs3600/200Cover =Rs18/Cover Total of dispatching Activity Activity Despatching Sub Activity Packing charges labour Total Cost Per Cover COST PER UNIT OF THE PRODUCT Cost Rs3500 Rs100 Rs3600/box Rs18/Cover Babasabpatilfreeppt.

00 136.68 Babasabpatilfreeppt.232 0.“Activity Based Costing as a measure of improving the cost structure at Akash industries” ACTIVITIES 1 2 PURCHASE OF RAW MATERIALS MANUFACTURING Shearing Circle cutting Deep drawing Trimming Piercing INSPECTION PAINTING DESPATCHING GRAND TOTAL Amount in Rs 1.com 58 .9578 0.639 0.0422 19.90 18.5734 0.468 Total COST/COVER Amt in Rs 95.017 3 4 5 3.2766 0.

home appliances automobile industry and the defense. Akash Industries are specialized in deep drawn components that cater the electrical. 2. Akash Industries follows traditional method of costing. elevator.com 59 .“Activity Based Costing as a measure of improving the cost structure at Akash industries” FINDINGS FINDINGS 1. 3. Babasabpatilfreeppt. The product UC Range series 4 end cover is over costed.

According to costing followed by Akash Industries they first identify the cost then they go for producing the product rather than identifying the activities first. Akash Industries relates overheads to cost centers which are not realistic to the behavior of costs. To get a realistic analysis of cost behavior. 11. According to Activity Based costing the cost of the cover is Rs136. Appropriate variable overheads are identified to individual products through ABC.“Activity Based Costing as a measure of improving the cost structure at Akash industries” 4. 8. All levels of activities in the manufacturing cost hierarchy viz unit level.com 60 . According to traditional costing the cost of the cover is Rs. product level and facility level have been identified. Babasabpatilfreeppt.68 6. Cost drivers for the activities have been identified. 10. 9. the overheads have been properly related to cost drivers.50 5. batch level. 7.143.

Instead of focusing more on cost reduction they should focus more on cost control. Babasabpatilfreeppt.com 61 . 2. As ABC integrates well with Six Sigma and continuous improvement programs the company can achieve minimum rejection rate. To arrive at the actual cost of the product. overheads should not be directly assigned to the cost center which is basically done in traditional costing. 4.“Activity Based Costing as a measure of improving the cost structure at Akash industries” SUGGESTIONS SUGGESTIONS 1. 3. Akash Industries should adopt Activity Based costing in their organization.

make some jobs part time. 9. Akash Industries can adopt cost control strategy where in the company can begin by evaluating non-labor expenses which can be controlled. as well as effecting the change. Everything from cleaning materials to the cost of vehicle operation . 7. Organization-wide awareness should be extended to convince the participants to change. outsourcing to specialists. consider if some other choice of labor cost saving is available. 6. Overheads are part of running a business but can be controlled. If it is possible to amalgamate two jobs into one. consumable materials and staff employment costs can. Labor and employment costs are a source of considerable expense and should be constantly monitored.com 62 . use temporary contract labor. 8. and must be kept as low as possible. 10.“Activity Based Costing as a measure of improving the cost structure at Akash industries” 5. Babasabpatilfreeppt. machine maintenance. Akash Industries should follow an open style with clear and concise objective for the successful implementation of ABC.

ABC can successfully link the product costs to production knowledge. Babasabpatilfreeppt.com 63 . This method is a dynamic tool for continuous improvement.“Activity Based Costing as a measure of improving the cost structure at Akash industries” CONCLUSION CONCLUSION ABC utilizes the activity concept and by using the activities. any enterprise will have a built in competitive cost advantage and can continuously add value to both its stakeholders and customers. how much time is needed to perform an activity and finally how much money is absorbed by performing this task are answered by the help of ABC studies. With ABC to its benefit. How a product is produced.

“Activity Based Costing as a measure of improving the cost structure at Akash industries” Therefore. customer service.com 64 . By focusing on processes that contribute to revenues and business operations. ABC can accurately determine how each process relates back to specific products. customers. or services. This can make a big difference after considering warehouse. With ABC you can drill into profitability and performance by almost any factor you can think of. sales. BIBLOGRAPHY Babasabpatilfreeppt. Activity-Based Costing measures the costs and profits of an organization based on the activities performed within that organization. if at all. administration and other costs that are often applied at a standard rate.

com Babasabpatilfreeppt.“Activity Based Costing as a measure of improving the cost structure at Akash industries” BIBLOGRAPHY  Books : 1) COST ACCOUNTING for BUSINESS MANAGERS by Asish K Bhatacharyya. 2) COST ACCOUNTING by I M Pandey  Websites : babasabpatilfreeppt.com 65 .

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