You are on page 1of 73


Introduction of the Project:The project report on Activity Based Costing is based on live experience of work. The project research was carried out in the tenure of 60 days form 1st June 2010 to 30th July 2010 with special reference to Thirumala Precicasts Pvt. Ltd, Solapur under the guidance of Mr. Bagban. The project named Activity Based Costing is the project where the cost of the product is calculated by considering all the activities involved in it. The main objective of the study is to understand various activities involved in the production as well as non production process and to find out the areas where the cost can be controlled. Activity Based Costing is the methodology used to trace overhead costs directly to cost object i.e. products, processes, services or customers and help managers to make the write decision regarding product mix and competitive strategies. In this project we show how activity based costing (ABC) can be applied and thereby provide more management- oriented information than the system currently employed. ABC has an advantage over conventional systems mainly in that it allocates Overhead costs to activities in a way that is more reflective of the factors that influence them. Although my project was a case study I believe that I learned several lessons that are applicable not only to Thirumala Precicasts Pvt. Ltd. but also to other companies. This includes 1. The primary benefit of ABC may be not that it is an improvement upon an already adequate system, but that it provides the structure for the establishment, for the first time, of a true management-oriented system. 2. To be successful, a system must be flexible rigid allocation rules cannot readily be imposed upon organizations.
Activity Based Costing Page 1

3. ABC, by assigning costs to previously unmeasured factors in decisions and providing a measure of the full cost of programs and activities, helps identify circumstances in which goals and objectives are out of line with spending decisions. The data required for this project is of two types i.e. 1. Primary data 2. Secondary data The primary data was collected by interacting with the head of the functional areas and the head of the various departments with the help of unstructured questionnaire and through observation of various processes. And the secondary data is collected from company documents, annual reports, company manual and internet and this data is also useful for conceptual framework and to know the study of financial statement used by the organization.

Project Title: Activity Based Costing

Objectives: There are different objectives for which the study has been completed. They are as follows:Primary Objectives:1. Identify the activities performed in a process. 2. Identify the cost each activity. Secondary Objectives:1. Discuss contribution margin and how to calculate the contribution ratio. 2. Describe the difference between traditional cost systems and activity-based Costing. 3. Identify why most companies prefer activity-based costing. 4. Describe the impact of changes in fixed costs and sales volume.

Activity Based Costing

Page 2

Reasons behind choosing this company and this project:

The company Thirumala Precicasts Pvt. Ltd, Solapur is the most popular company in the Solapur where the manufacturing of the investing castings is done. I am mainly interested in Core Concepts of the finance and I have taken this opportunity. The company has given me good platform for studying all the concepts of the manufacturing firm also the company has provided me all types of data and guidelines whenever necessary. The reason behind choosing this topic is to study the core concepts of the company as well as to study the activity involved in the production process.


Balaji Bhavan 165/A, Railway Lines, Solapur- 413001. (INDIA) Tel.No. 0091-217-2734522/23/24 Fax.No. 0091-217-2734521&2310821 Work: 0091-217-2734525 E-mail: Website:

The duration of the project was 60 days from 1st June2010 to 30th July2010.

From the study of all the aspects of the company I came to know, how to allocate the costs to overheads and how to manage the cost of overheads as well as this project also helped me in understanding the core concepts of manufacturing firm.
Activity Based Costing Page 3


Activity Based Costing

ABC was first clearly defined in 1987 by Roberts Kaplan and W.Bruns. They initially focused on manufacturing industry where increasing technology and productivity improvements have 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 reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost. ABC is a methodology that measures the cost and performance of activities, resources, and cost objects to provide more accurate cost information for managerial decision making. ABC is not an accounting exercise, but rather a methodology that produces a bill of activities that describes the cost buildup for individual products, services, or customers. By recognizing the causal relationships among resources, activities, and cost objects such as products or customers, ABC allows one to identify inefficient or unnecessary activities and opportunities for cost reduction or profit enhancement.

As shown in Figure 1, there are two views of ABC: a cost assignment view and a process view. The cost assignment view assigns costs to the significant activities of an organization. Activities are then assigned to a cost object that uses the activities such as a product or customer. The process view provides operational intelligence about the processes of an organization. A process is a series of activities that are linked together to achieve an objective. The process view provides information about cost drivers and performance measures for each activity or series of activities in a process.
Activity Based Costing Page 4

Cost Assignment View

Process View

Cost Drivers


Performance Measures

Cost Objects

Figure 1. The ABC Model (Turney 1991: 81) The cost assignment view is comprised of three building blocks: resources, activities, and cost objects (Figure 1). Resources are economic elements that are the sources of cost. In a logistics operation, resources can include direct labor, direct material, and indirect costs (e.g., overhead and management salaries). Activities are the processes or procedures that produce work. Logistics activities, for example, can include transportation, distribution, warehousing, order processing, and customer service. Since activities use resources, they are connected to activities via resource drivers that approximate the use of resources by activities (e.g., square footage, percent of effort, etc.). Each resource that is traced to an activity becomes a cost element in an activity cost pool that measures the total cost associated with an activity. This provides a better understanding of why resources are used. The information provided can help identify

Activity Based Costing

Page 5

which activities consume the most resources and where cost reduction opportunities may exist. The next step after assigning resources to activities is to trace the activities to cost objects. A cost object is typically a product, product line, or customer, so it is the reason why work is performed. Activity drivers measure the use of activities by the cost object, thus linking activities to cost objects. The total cost of the cost object is the sum of all the activity costs used by the cost object. This process provides economic information to help in analyzing decisions such as pricing, product mix, sourcing, product design, and improvement efforts. As shown in Figure 1, three main building blocks comprise the process view: cost drivers, activities, and performance. Cost drivers determine why and how much work is required to perform an activity or a chain of activities. A customer order, for example, initiates the order processing chain of activities --the why. The size of the customer order determines how much work is required --the effort. Cost drivers include both internal factors related to a specific activity and factors related to prior activities. Each activity in a series is a customer of a prior activity. Activities work together in an internal customer chain to provide value to the external customer.

Cost drivers are important because they reveal opportunities for improvement. A defect part received from a supplier, for example, will require correction activity to correct the problem, thereby expending more effort and resources. A quality certification program could help reduce a suppliers defect rate and thus reduce total costs of both the buyer and supplier. Performance measures identify how well an activity is performed. Typical performance measures include activity efficiency, time required to complete an activity, and quality of work. Generally, the longer it takes to perform an activity, the greater the resources used and overall costs. Likewise, poor quality usually results in the use of more resources (e.g., scrap and rework in manufacturing organizations) and higher overall costs. The objective is to use this information to help improve performance and increase the value of products and services.

Activity Based Costing

Page 6


A method of measuring the cost and performance of activities and cost objects.

1.1 DETAILS ABOUT ACTIVITY-BASED COSTING SYSTEM:Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed costs. Activity based costing is ordinarily used as a supplement to rather than as a replacement for the companies usual costing system. Most organization that use activity based costing have two costing system the official costing system that is used for preparing external financial reports and the activity based costing system that is used for internal decision making and for managing activities.


1. Non-manufacturing as well as manufacturing costs may be assigned to product. 2. Some manufacturing costs may be excluded from product cost. 3. A number of over head cost pools are used, each of which is allocated to product and other costing objects using its own unique measure of activity. 4. The allocation bases often differ from those used in traditional costing systems, 5. The overhead rates, or activity rates, may be based on the level of activity at capacity rather than on the budgeted level of activity.

Activity Based Costing

Page 7


You cannot compete or even begin to compare until you know how to cost. ABC is a cost accounting methodology that can provide definitions of processed, identify what the cost drivers of those processes are, determine the unit costs of various products and services, and create various reports on agency components that can be utilized to generate activity or performance based budgets. A major advantage of using ABC is that is avoids or minimizes distortions in product costing that result from arbitrary allocations of indirect costs. Unlike more traditional line item budgets which cannot be tied to specific outputs, ABC generates 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 for improvement. It encourages management to evaluate the efficiency and cost effectiveness of program activities. Some ABC systems rank activities by the degree to which they add value to the organization or its outputs. This helps managers identify what activities are really value added those that will best accomplish a mission, deliver a service, or meet customer demand thus improving decision making through better information, and helping to eliminate waste by encouraging employees to look at all costs. That is why an essential aspect of any ABC endeavor is to get a clear picture of the activities a business area performs, when employees understand the activities they perform, they can better understand the costs involved. Up to this point in managerial accounting we have discussed product costing systems primarily designed to provide unit product cost information for financial statement purposes. These systems use actual direct material cost, actual direct labor cost, and a volume based allocation rate to apply overhead to cost products. Overhead is applied based on a predetermined overhead rate calculated by dividing total estimated manufacturing over head by some volume allocation base such as direct labor hours or machine hours. Now we are going to study a new costing system, activity based costing.
Activity Based Costing Page 8

Note that ABC will not take the place of the financial statement costing system but will be used as a supplemental costing system for management purpose.


1. 2. 3. 4. 5. Sales are increase but profits are declining. Overhead rates are very high and increasing overtime. Product lines are diverse. Direct labor is small percent of total cost. Competitors high-volume product seems to be priced unrealistically low.


The implementation process is broken down into following six basic steps:

STEP 1: IDENTIFY AND DEFINE ACTIVITIES AND ACTIVITY COST POOLS: The first step in implementing an ABC system is to identify the activities that will form the foundation for the system. A common procedure is to interview people who work in overhead departments about their major activities. This results in very long list of activities. On one hand, the greater the list of activities tracked in the ABC system, the more accurate the costs are likely to be. On the other hand, it is costly to design, implement, maintain, and use a complex system involving large numbers of activities. The original list of activities is usually reduced to a handful by combining similar activities. For example, several actions may be involved in handling and moving raw materials from receiving raw materials to sorting them into the appropriate bins in the storeroom. All these activities might be combined into single activity called material handling.

Activity Based Costing

Page 9

A general way of combining activities is to organize them into five levels: 1. UNIT-LEVEL: Unit-level activities are performed each time a unit is produced. 2. BATCH-LEVEL: Batch-level activities are performed each time a batch is handled or processed, regardless of how many units in the batch. 3. PRODUCT-LEVEL: Product-level activities relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold. 4. CUSTOMER-LEVEL: Customer-level activities relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product. 5. ORGANIZATION-SUSTAINING: Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. In general it is best to combine only those activities that are highly correlated with each other within a level i.e., if they tend to move in tandem. After this activity cost pools are selected. An activity cost pool is a bucket in which costs are accumulated that relate to a single activity measure in the ABC system. An activity measure is an allocation base in an activity based costing system. The term cost driver is also used to refer to an activity measure. The activity measure should drive the cost being allocated. Activity measures are often very rough measures of resource consumption. Probably the least accurate type of activity measure is known as transaction driver. Transaction drivers are simple counts of the number of times an activity occurs such as the number of bills sent out to customers. However a more accurate type of activity measure known as duration driver may be used. Duration drivers are measures of the amount of time required to perform an activity such as time spent in preparing such bills.

Activity Based Costing

Page 10

STEP 2: DIRECTLY TRACE OVERHEAD COSTS TO ACTIVITY AND COST OBJECTS: The second step in implementing an ABC system is to directly trace as many overhead costs as possible to the ultimate cost objects. The ultimate cost objects are products, customers orders, and customers. Consider an example below: The companys annual cost includes manufacturing overhead and selling, general, and administrative costs. In the ABC system, all of these costs are considered to be overhead and will be assigned to cost objects where appropriate. One of this overhead costs-shipping-can is traced directly to customer orders. The company is directly billed for each customer order it ships, so it is a simple matter to trace these costs to the customer orders. Customers do not pay these actual shipping costs; instead they pay a standard shipping charge that can differ substantially from actual bill that company receives from the freight company. STEP 3: ASSIGN COSTS TO ACTIVITY COST POOLS: In this step costs should be traced directly to the activity to the activity cost pools. It is quiet common for an overhead department to be involved in several of the activities that are tracked in the ABC system. In such situations, the costs of the department are divided among the activity cost pools via an allocation process called first-stage allocation. First-stage allocation is the process by which overhead costs are assigned to activity cost pools. Step 4: CALCULATE ACTIVITY RATES: In this step the total activity for each cost pool that would be required to produce the organizations present product mix and to serve its present customers is determined. The activity rates are computed by dividing the total cost for each activity by its total activity.

Activity Based Costing

Page 11

Total cost of each activity Activity rate = Total activity STEP 5: ASSIGN COST TO COST OBJECTS: The fifth step in the implementation of activity-based costing is called secondstage allocation. In the second stage allocation, activity rates are used to apply costs to products and customers. This allocation can be done using the following formula Activity Rate Amount of Activity STEP 6: PREPARE MANAGEMENT REPORTS: In this step a report is prepared showing activity-based costing margins from an activity view. The overhead costs computed in previous steps are combined with direct materials and direct labor cost data. For each of the products, these combined costs are deducted from sales to arrive at product margins.


NON MANUFACTURING COSTS: In traditional cost accounting, only manufacturing costs are assigned to products, Selling, general and administrative expenses are treated as period expenses and are not assigned to products .However, many of these non manufacturing costs are also part of the costs of producing, selling, distributing and servicing products. For example, commissions paid to salespersons, shipping costs, and warranty repair costs can be easily allocated to individual products. In activity-based costing , products are assigned all of the overhead costs manufacturing as well as non manufacturing- that they can reasonably be supposed to have caused.
Activity Based Costing Page 12

1. MANUFACTURING COSTS: In traditional cost accounting, all manufacturing costs are assigned to products even manufacturing costs that are not caused by the products. For example, a portion of the factory security guards wages would be allocated to each product even though the guards wages are totally unaffected by which products are made or not made during a period. In activity-based costing, a cost is assigned to a product only if there is good reason to believe that the cost would be affected by decisions concerning the product. 2. COST OF IDLE CAPACITY: In traditional cost accounting, predetermined overhead rates are computed by dividing budgeted overhead costs by a measure of budgeted activity such as budgeted direct labour-hours. Total Estimated Manufacturing Overhead Predetermined Overhead rate = Direct-labour hours or Machine hours This practice results in y y Applying the costs of unused, or idle capacity to products Unstable unit product costs If budgeted activity falls, the overhead rate increases because the fixed components of overhead are spread over a smaller base, resulting in increased unit product costs. In contrast to traditional cost accounting, in activity-based costing, products are charged for the costs of capacity they use not for the costs of capacity they dont use. In other words, the costs of idle capacity are not charged to products. This result in y more stable unit costs y consistency with the objective of assigning only those costs to products that are actually Caused by the products Instead of assigning the costs of idle capacity to
Activity Based Costing Page 13

products, in activity-based costing these costs are considered to be period costs that flow through to the income statement as an expense of the current period. This treatment highlights the cost of idle capacity rather than adding it in inventory and cost of goods sold. 3. FLOW OF ACTIVITIES: ABC tracks the flow of activities by creating a cause and effect link between the activity (resource consumption) and the cost object. core areas:
y y y y y

The flow is through five

Resources Resource drivers (% of time, sq ft occupied, equipment hours, etc) Activities Activity drivers (number of reports, number of items, number of moves, etc) Cost objects (products services, customers, market areas) Diagrammatically we can show this as follows:

Activity Based Costing

Page 14

You will notice that the direction of the arrows are different; the ABC model brings detailed information from the processes up to assess costs and manage capacity on many levels whereas the TCA model simply allocates costs, down onto the cost objects without considering any 'cause and effect' relations. 4. CONSUMPTION OF RESOURCES VERSUS CONSUMPTION OF ACTIVITIES: In traditional cost accounting, underlying assumption is that costs can be managed. The benefit of the ABC mindset is that it opens up for a much wider array of measures when it comes to improving productivity. By investigating systematically what is being done, i.e. the activities, one will not only be able to identify surplus capacity if it occurs, but also lack of capacity and misallocation of capacity. A result of this might be that costs are cut the traditional way, but it might as well lead to a reallocation of capacity to where it is most needed which will yield high productivity 5. STRUCTURE-ORIENTATION VERSUS PROCESS-ORIENTATION: Traditional costing systems are more concerned about the organizational charts than the actual process. Traditional cost accounting systems are therefore structurally oriented and the process view is completely missing. The result is capacity
Activity Based Costing Page 15

management is known and resource management is unknown because the process is unknown. Capacity is measured as an expense and found easily in the traditional cost accounting system. Resources are required in order to do a job and measured as a cost, but the resource measures can only be found by investigating the processes. ABC is process-oriented. It gathers information from the processes it can be used to identify both capacity and resource allocation most productively. ABC can therefore give managers the ability to match the resource needs with the available capacity as closely as possible, and hence improving productivity. From this we understand that the structure oriented approach of traditional costing systems gives no decision. 6. COST ASSIGNMENT AND ALLOCATION: TCA historically uses direct labour or some other volume related allocation basis for attributing costs. But as overhead has grown and new technologies have come, it goes without saying that assigning costs based on only 5 - 15% of total costs is highly risky. In fact, the incurred errors are up to several hundred percent. ABC assigns costs according to the causal relationship between activities and

cost objects, which is captured using drivers, of which there are two types, activity drivers that keep track of how cost object behaviour influences activity levels and resource drivers that keep track of how the subsequent activity level affects the resource consumption. The drivers are estimates of actual cost behaviour and can

therefore also be used to identify, or they are themselves, the critical cost factors. As the drivers are related to the actual processes, they can occur on several levels, some of the common levels are:

Unit - these are triggered for every unit that is being produced. Generally it is a volume related driver similar to the traditional allocation bases.

Batch - these drivers are triggered for every batch produced, e.g. production planning. The number of batches could be the driver.
Activity Based Costing Page 16

Product - product level drivers are triggered for every product regardless of the number of units and batches produced. Product development hours per product would be a good driver here as the more time taken to develop a particular product should be reflected in the product development costs attributed to that product.

Facility - these drivers are not related to the products at all. Costs that are traced by such drivers will therefore be allocated to products and not traced. The difference between allocation and tracing is that allocation is quite arbitrary whereas tracing is based on 'cause and effect' relations.


Resources are assigned to Activities are assigned to Cost Objects

Teaching Expenses Research Administration

Student Subject Research Service

A cost assignment is the apportionment or distribution of cost from a source object to a Destination object based on the consumption of the source object by the destination object. The degree of the observation of the consumption relationship determines if the assignment Method is known as direct tracing, which is directly observable or driver tracing, the term for Consumption that is not directly observable.

Activity Based Costing

Page 17


In activity based costing system ease of adjustment codes are used for cost. There are three colours used for cost classification. 1. Green Color Cost 2. Yellow Color Cost 3. Red Color Cost 1. GREEN COLOUR COST: The cost which is automatically adjusted with the changes in activity, without management action is green color cost. Examples are y y Direct material cost Shipping cost, etc.

2. YELLOW COLOUR COST: The cost which need to be adjusted with the changes in activity but management action would be required are termed as green colour cost. Examples are y y y y y y y Direct labour cost Indirect factory wages Factory utilities Administrative wages and salaries Office equipment depreciation Marketing wages and salaries Selling expenses, etc.

3. RED COLOUR COST: The cost which are adjusted by management action and it is very difficult to adjust with the changes in activities are red colour cost. Examples are y y Factory equipment depreciation Factory/Administration building lease

Activity Based Costing

Page 18


Following are some limitations of activity-based costing system. 1. Implementing an activity based costing system is a major project that requires substantial resources. And once implemented, an activity-based costing system is more costly to maintain than a traditional direct-labour based costing system. 2. Activity-based costing data can be easily misinterpreted must be used with care when used in making decisions. 3. Managers insists on fully allocating all costs to products, customers and other costing objects in an activity-based costing system including the cost of idle capacity and organization sustaining costs. This results in overstated cost and understated margins and mistakes in pricing and other critical decisions. 4. An organization involved in activity-based costing should have two cost systems one for internal use and another for external reports. This is costlier than maintaining just one system and may cause confusion about which system is to be believed and relied on.

Activity Based Costing

Page 19

Gaining more accurate cost information through ABC is only half the battle. The key is to use the information to make improvements. ABM complements ABC by using ABC information in the analyses of processes to identify inefficiencies and non-value added activities. It deals with effectively managing activities to yield continuous improvement by answering why and how well activities are adding value to products and services. The goals of ABM are to improve the value received by customers and to improve profits by providing this value. Turney recommends a three-step approach. First, analyze processes to identify nonvalue added or nonessential activities for possible elimination. This step entails comparing activities to best practices to determine the scope of improvement and examining the links between activities in a process to minimize time and duplication. The second step involves identifying and eliminating cost drivers that create waste through nonessential or inefficient activities. Finally, measure activity performance that contributes to the organizations mission and success. These steps help guide strategic decisions and determine overall effectiveness. ABM can identify how to reduce cost by employing techniques such as decreasing time and effort, eliminating unnecessary activities, selecting low cost activities, sharing activities, and redeploying unused resources. For many reasons, organizations sometimes fail to use the information provided by their ABC models. A study by Cooper et al. examined eight diverse companies and found that most of them had not acted on the ABC information. The authors suggest that these delays stem partly from inadequate preparation to make changes. ABC information, by itself, does not produce change. The key is to translate the information into action. This requires a conscious process of organizational change and implementation. The authors found that the most successful ABC projects have sponsors or project managers who are authorized to make changes.

Activity Based Costing

Page 20


Given that organizations typically make few decisions without analyzing costs in some way, accurate cost information is vital to the success of most organizations. The types of products that are sold, where they are sold, and how they are designed and manufactured are typical decisions that require the analysis of costs. By using incorrect cost information, however, organizations can make wrong decisions and hinder performance and competitiveness. Unfortunately, traditional cost systems that apportion overhead costs of indirect activities based on direct costs such as material and labor can yield incorrect information. The main problem is that traditional cost systems allocate overhead costs of indirect activities based on convention, rather than on how costs are actually generated. Consequently, the costs of products and services do not represent the demands made by each product or service on the organizations resources. When overhead costs of indirect activities were a small percentage of the total direct costs, traditional cost systems were adequate. Today, however, these traditional cost systems are not in step with the internal and external business environment. For instance, the trend toward automation and the displacement of the direct labor force by knowledge workers decreases the proportion of direct labor costs, thereby increasing the overhead costs of indirect activities. For some organizations, overhead is the major source of costs. Under such conditions, traditional cost systems that apportion overhead costs of indirect activities based on a decreasing proportion of direct labor costs can distort cost information. The fundamental problem is that traditional cost systems assign costs directly to the products or services, so there is no information about the activities. Costs are usually compartmentalized into departments even though many processes and activities overlap across departments. Excessive output, functional myopia, and misdirected effort are some of the problems partly attributable to traditional cost systems. Consequently, traditional cost systems can actually hide problems and fail to identify improvement opportunities.

Activity Based Costing

Page 21

In contrast, ABC provides more accurate cost information by assigning costs to the activities that generate the costs, and then assigning the costs from the activities to the products or services. Unlike traditional cost systems, ABC assumes that activities cause cost, not products or services (i.e., products and services merely create demand for activities). By knowing what activities cost, organizations can identify activities that have the greatest potential for cost reduction. This more accurate cost information allows organizations to make improvements such as eliminating waste from overhead activities that are inefficient or nonessential. Although beneficial to many organizations, ABC often takes more time to implement than expected and may actually fail in some cases. Krumwiede (1998) found that ABC implementations can be difficult and may take several years before some organizations can reach the usage stage. Landry, Wood, and Lindquist (1997) identified many factors that can cause some implementations to fail such as too many cost drivers, lack of followthrough, too much emphasis on consensus, and improper administration. Finally, Palmer and Vied (1998) found that some organizations encounter difficulties integrating ABC with reporting and performance measurement systems.

Activity Based Costing

Page 22


ADDRESS: - Balaji Bhavan 165/A, Railway Lines, Solapur- 413001. (INDIA) Tel.No. 0091-217-2734522/23/24 Fax.No. 0091-217-2734521&2310821 Work: 0091-217-2734525 E-mail: Website: LOGO:

THIRUMALA PRECICAST PRIVATE LIMITED. In a world where precision of the components of paramount importance Thirumala Precicasts Private Limited. TPPL was established in 1995 at ULEGAON, near Solapur located in Maharashtra, India. In a short time it has achieved reputation of being one of the leading investment castings foundries specialized in manufacturing parts for Defence, Small fire arms, Medical equipments and surgical implants. TPPL at present is manufacturing investment castings from few grams up to 10.0 kgs in all types of ferrous, nickel base and cobalt base alloys.

Activity Based Costing Page 23

y y y 1995 Three young brothers came together for starting joint venture. 1996 They started providing products to the local customer. 2002 Started with exporting their precious Investment Castings to Multinational Companies. y 2003 Started supplying precision castings to BHARAT HEAVY ELECTRICALS LIMITED y 2004 Certificate of Approval in recognition of having established Quality System As Per GREAVES COTTON LIMITED. y 2004 Vendor Registration in BHARAT DYNAMICS LIMITED (A Govt. of India Enterprise) Bhanur (A.P.) India. y 2005 Dividend distribution first time in the companys history for their Shareholders. y y 2006 Agreement with Dun & Bradstreet Information India Pvt. Ltd. 2007 TUV CERT- Certification Body for Pressure Equipment of TUV NORD Systems GMbH & Co. KG. y 2007 Vendor Registration in SMALL ARM FACTORY (A Govt. of India Ministry of Defence) Kanpur (U.P.) India. y 2008 Vendor Registration in ORDNANCE FACTORY (A Govt. of India Ministry of Defence) Tiruchirapalli (T.M.) India. y 2008 Vendor Registration in HEAVY VEHICLE FACTORY (A Govt. of India Ministry of Defence) Avadi (T.M.) India.

Activity Based Costing

Page 24




















INCHARGE STORES Activity Based Costing


COMPANY PROCESS:Estimate/Technical Resources Verification

Customer Marketing Purchasing Manufacturin g Die Section




Waxing Pattern Making


Receiving Inspection

Quality and Process

Shell Building De waxing


Customer Complaint



Pre Heating Of Shells


Melting Pouring Fettling

Heat Treatment






Dispatch Customer


Activity Based Costing

Page 26

1. Choice of Alloy selection: Practically any alloy can be investment cast wide range of ferrous alloys is regularly cast at Thirumala Precicasts Pvt. Ltd. 2. Design Flexibility: Almost any shape or complex can be investment cast. Investment casting offers designers freedom of design in wide range of alloys with close dimension tolerances and fine details. 3. Cost Reduction: Investment casting offers a near net shape then reducing or eliminating costly machining operations. 4. Increase manufacturing Capacity: As almost final shape is available on investment casting, machine tools are released for finish machining operations. 5. Cut Assembly Operations: Complex assemblies can be cast as per single unit reducing handling, assembly and inspection cost. 6. Casting Capability: Casting weight from 2 gms to 10 kg can be cost at TPPL. Max. Casting size 14" x 16". 7. Casting Tolerance: METRIC Up to 25 mm Up to 50 mm Up to 75 mm Up to 100 mm Up to 125 mm Up to 150 mm .127 mm .254 mm .381 mm .483 mm .559 mm .635 mm

Activity Based Costing

Page 27

8. Flatness: Flatness refers to single plane surface and is usually a function METRIC Thickness Up to 6.5 mm 6.5 mm to 13 mm 13 mm to 25 mm 25 mm to 50 mm Dish per 42 sq. cm of surface Insignificant 0.102 mm TIR 0.201 mm TIR 0.406 mm TIR

9. Straightness: Tolerances for axial Straightness: .005 in per inch (.127 mm per 25 mm) as cast. 10. Concentricity: a. Concentricity of diameters in a shaft is also a function of straightness. Centers will be concentric within .005 in per inch (.127 mm per 25 mm) of maximum separation. b. Centers of I.D. to O.D. will be concentric within .003 in per 1/2 in. (.076 mm per 13 mm) of wall thickness. This disregards out-of-roundness, and assumes measurements in the same plane if the concentricity is being measured in separate planes, the requirements of paragraph 1 above must be added. 11. Angles: As-cast tolerances of angles depend on their location in casting. They range from 1/2 degree for well supported positions to 2 degree where inherent distortion could be expected. Inclusion of gussets and ribs often minimizes distortion and many sections can be mechanically straightened.

Activity Based Costing

Page 28

SURFACE FINISH Metal Aluminum Beryllium Copper Cobalt Chrome 300 Series Stainless Carbon Steel 400 Series Stainless MICROMETERS Average Value 1.50 - 2.50 1.50 - 2.50 2.00 - 2.50 2.25 - 3.20 2.25 - 3.20 2.50 - 3.20


Die Development & Tool Room: Due to in house tool room, any critical job can be developed within targeted time limit.

Wax Pattern Production: The process begins with producing wax replicas of the final casting by injecting wax in to a metallic die.

Activity Based Costing

Page 29

Assembly: The patterns are fastened by gate on a wax stick to make cluster or assembly.

Shell Building: This involves dipping the entire assembly into ceramic slurry and then coating it with fine ceramic sand and repeating it to form a self supporting shell.

Dewax: The wax is melted out leaving a ceramic shell containing the cavities in place of wax patterns.

Shell Firing and Casting: Fired shells are poured with molten metal.

Activity Based Costing

Page 30

Knockout: When the poured mould is cooled the ceramic material is removed from the casting cluster by mechanical vibrations.

Finishing: The castings are then finished by belt grinding deburring and any other secondary operations like heat treating, straightening and are ready for shipping to customer.

Dispatches: The finished castings are safely delivered at customers doorstep in export worthy packaging.

Activity Based Costing

Page 31


Parts for valves and Pr. vessel equipment

Valve Parts

Swith Gear Parts Showing capability for compVarious Parts cast in S.S. for Surgical Implants and medical equipments Design

Reduction in machine leading to cost saving a ascast holes with close dimensional tolerences

Parts of Machine Tools

Activity Based Costing

Page 32

Critical Component for Defence Equipments

Parts of Defence Equipments

Parts for valves and Pr. Vessel equipments

Pistol Body frame with other accessories

Activity Based Costing

Page 33


Study of theory

Data Collection (Primary & Secondary Data)

Analysis of Data

Interpretation of Data

Observations & Findings



The Research Methodology here includes: Objective of study  Meaning of Research.  Research Design.  Data Collection method.

Activity Based Costing

Page 34

1. OBJECTIVE OF THE STUDY :Objectives are the ends that states specifically how goal be achieved. Every study must have an objective for which all the efforts have been done. Without objective no research can be conducted and no result can be obtained. On the basis of objective all the research process is followed. Objectives are the main aspect of every study. The objective of the study gives direction to go through the research problem. It guides the researcher and keeps him on track. I have two objectives regarding my research project. These are shown below: Primary objective  Secondary objective

Primary objective:1. 2.
Identify the activities performed in a process. Identify the cost each activity.

Secondary objective:1. Discuss contribution margin and how to calculate the contribution ratio. 2. Describe the difference between traditional cost systems and activity-based Costing. 3. Identify why most companies prefer activity-based costing. 4. Describe the impact of changes in fixed costs and sales volume.

2. RESEARCH METHODOLOGY :Definition:The process which includes defining and redefining problems , formulating hypothesis or suggested solutions; collecting ,organizing and evaluating data, making deductions and reaching conclusions, and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. - Clifford Woddy
Activity Based Costing Page 35

Research is the process of systematically obtain accurate answers to significant and pertinent questions by the use of scientific method gathering and interpreting information. - C lover and Balsley

Meaning of the term Research:From the definition of research, it is clear that research is an activity undertaken to establish the facts and principles in a scientific way, rather it is a method of discovering the truth in a scientific way. The very common meaning of research is a search for knowledge. Research is an art of scientific investigation. It is a movement from the unknown to known. Curiosity is an essential natural feeling of every human being. Whenever the unknown fact confronts us, we try to find the meaning and causes of that fact. This feeling of human being is the mother of all knowledge and the method which he employs for obtaining the knowledge of whatever the unknown is called as research. Thus, research is a voyage of discovery. It is a scientific and systematic search for pertinent information on a specific topic.

3. RESEARCH DESIGN :A research design is the arrangement of conditions for collection and analysis data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research Design is the conceptual structure within which research in conducted. It constitutes the blueprint for the collection measurement and analysis of data. Research Design includes and outline of what the researcher will do from writing the hypothesis and its operational implication to the final analysis of data. A research design is a framework for the study and is used as guide in collection and analyzing the data. It is a strategy specifying which approach will be used for gathering and analyzing the data. The design is such studies must be rigid, not flexible and must focus attention on the following: What to study?  Why is the study being made?
Activity Based Costing Page 36

 Where will the study be carried out?  What type of data is required?  Where required data can be found?  What period of time will the study include?  What will be sample design?  What techniques of data collection will be used?  How will the data be analyzed?  In what style will the report be prepared?

Research Design Used in the Study:Research has got a very specific objective and clear cut data requirements .The researcher had to use fact and information already available and analyses these to make critical evaluation of the available material. Hence by making the type of the research conducted to be Analytical in nature.

4. DATA COLLECTION METHOD :The process of data collection begins after a research problem has been defined and research design has been chalked out. There are two types of data  Primary Data  Secondary Data

Primary Data:In primary data collection, you collect the data yourself using methods such as interviews and questionnaires. The key point here is that the data you collect is unique to you and your research and, until you publish, no one else has access to it. It is first hand data, which is collected by researcher itself. Primary data is collected by various approaches so as to get a precise, accurate, realistic and relevant data. The main tool in gathering primary data was investigation and observation. It was achieved by a direct approach and observation from the officials of the company.

Activity Based Costing

Page 37

 Sources of primary data:y Interaction: - The primary data collection consists of the interaction with The Team Members of the Finance floor and the staff of the Plant. A lot of information was available by the Plants trainings, interacting with the staff members and the trainers. y Observation: - Observation involves recording the behavioral patterns of people, objects and events in a systematic manner.

Secondary Data:Secondary data may be defined as data that has been collected earlier for some purpose other than the purpose of the present study. Any data that is available prior to the commencement of the research project is a secondary data and therefore secondary data is also called historical data. It often obviates the need of primary data collection and saves valuable time. Even where subsequent data collection is required, an analysis of secondary data enlightens the researcher regarding many aspects of the study and gives contextual familiarity for primary data collection. It thus provides rich insight into the research process. Researcher has to analyze the data and interprets the results. It has always been important for the completion of any report. It provides reliable, suitable, adequate and specific knowledge.

 Sources of Secondary Data :y Paper-based sources :Books, abstracts, indexes, directories, research reports, conference papers, market reports, annual reports, internal records of organizations, newspapers and magazines. y Electronic sources :CD-ROMs, on-line databases, Internet, videos and broadcasts. The company profile was collected from website of Thirumala Precicasts Pvt. Ltd. (TPPL),
Activity Based Costing Page 38


Percentage of Cost Elements

Sr.No. 1 Raw Material a) Wax



26.25% 25.41% 3.78%

b) Shell Material c) Metal 2 Process a) Fuel & Power b) Fettling, NABL, Testing, Labour, H/T, Transport, etc. 3 Overheads Total Production

14.11% 23.45%

7.00% 100.00%

Activity Based Costing

Page 39

Cost Element

Raw Material Process Overhead

Interpretation:With above table we can see that various cost incurred in production process. As per this table Raw material cost approximately 55.44% of total production cost which is the major cost in production process. Another second vital cost involved in production process is Process Cost which includes Fuel & Power, Fettling etc. which is approximately 37.56%. And overheads cost is approximately 7.00% of total production cost.

Activity Based Costing

Page 40

Expense Categories and Their Respective Cost Drivers Expenses Category Administration Depreciation Rent and utilities Office expenses Transport Interest Product shipment Business travel Business insurance and legal expenses Advertising Entertainment Miscellaneous expenses Cost (Rs.) 1564287 1162907 276720 1079705 735772 1737057 357268 428570 391950 113626 201166 71677 Cost Drivers Time (hours) Rupee use of Resources Space Level of use of office resources (%) Distance (miles) Cost of the activity Weight Distance Cost of resource used by the activity Level of benefit Level of importance of customer None

Main Activities and Their Second Stage Cost Drivers Activity Customer contact Quote preparation Engineering work Material purchasing Production preparation Material receiving and handling Production management and supervision Quality assurance Product shipping Customer payment administration General management and administration Cost Drivers Number of customer contacts Number of quotes Engineering hour Number of purchase orders Number of production runs Number of receptions Product complexity Product complexity Distance Number of payments Intensity of activities

Activity Based Costing

Page 41

Overhead Allocation

Overhead Expenses Categories


Rent & Utilities


Product Shipment

Business Insurance



Office Expenses


Business Travel




Customer Contact

Engineering Work

Production Preparation

Production Management

Product Shipment

General Management

Quote Preparation

Material Purchasing

Material Receiving

Quality Assurance

Customer Payment




Catch Body

Activity Based Costing

Page 42

Expense-Activity-Dependence Miscellaneous expenses Business insurance and legal 1expenses

Product shipment

Rent and utilities

Office expenses

Business travel


Activities Customer contact Quote preparation Engineering work Material purchasing Production preparation Material receiving and handling Production management Quality assurance Product shipment Customer payment General management

Activity Based Costing

Page 43






Expense-Activity-Dependence ( In Percentage) Business insurance and legal 1expenses

Expenses Category Administration

Activities Customer contact Quote preparation Engineering work Material purchasing Production preparation Material receiving and handling Production management Quality assurance Product shipment Customer payment General management
0.06 0.01 0.24 0.63 0.64 0.58 0.09

0.10 0.10 0.08 0.70

0.05 0.12 0.09

0.40 0.08 0.09 0.80 0.14

0.09 0.09 0.09















0.10 0.05 0.04


0.20 0.12 0.01

0.02 0.05 0.08 0.60 1.00 0.23 0.46

0.09 0.09 0.09










Activity Based Costing

Page 44

Miscellaneous expenses

Product shipment

Rent and utilities

Office expenses

Business travel






Expense-Activity-Dependence(Rs. In Lakh)
15.64 2.76 10.80 7.36 17.37 3.57 4.28 3.92 1.13 2.01 11.63 0.72

Total Expenses

Business insurance and legal expenses Advertising

Rent and utilities

Product shipment

Business travel

Office expenses




Miscellaneous expenses
0.06 0.07 0.06 0.07 0.06 0.06 0.08 0.06 0.06 0.08 0.06



Total Cost

Activities Cust. contact Quote preparation Engineering work Mat. purchasing Production preparation Material receiving handling Prod. Mgt. Quality assurance Product shipment Cust. payment Gen. mgt.
0.94 0.03 2.59 2.70 0.73 1.17 8.22 3.29 1.56 0.14 1.52

11.54 1.56 8.14 0.33 0.85 0.60




13.9 0


1.31 0.63 0.30 0.32











3.68 5.87





10.60 0.78 0.33 0.54 4.41 3.57 0.91

0.63 2.82

0.03 0.19

0.87 2.16 3.47 0.98

1.80 0.78 0.40 0.84

3.41 11.70

Activity Based Costing

Page 45

Catch Body




Catch Body




Activity Based Costing Page 46

Expenses Category Expenses Category Customer contact Quote preparation Engineering work Material purchasing Production preparation Material receiving and handling Production preparation Quality assurance Product shipment Product shipment General management Activity-Product-Dependence(In Percentage)
0.47 0.40 0.70 0.52 0.52 0.47 0.39 0.00 0.42 0.41 0.34 0.53 0.60 0.10 0.34 0.27 0.41 0.27 0.00 0.26 0.38 0.33 0.00 0.00 0.20 0.14 0.21 0.12 0.34 1.00 0.32 0.21 0.33

Customer contact Activity-Product-Dependence Quote preparation Engineering work Material purchasing Production preparation Material receiving and handling Production preparation Quality assurance Product shipment Product shipment General management

Detail cost incurred in the actual production process:-

Fixed Cost:-

For producing the products there is need to prepare the die, die may contain N number of products. E.g. 1 Die = 10 Products 1 Die = 2 Products 1 Die = 100 Products So the fixed cost may vary depends on the size of product.

Fixed Cost = 450 per die 1 die = 10 products = Rs. 45/- per product. 1 die = 2 products = Rs.225/- per product.

1 die = 100 products = Rs. 4.5/- per product.

Activity Based Costing

Page 47

Cost allocation of each Activity in the Production Process:Sr. No. 1 2 3 4 5 6 7 Shell Metal Fuel Power Fettling Testing Total 8 15 % Rejection Total 9 Fixed Cost Total 10 15 % Margin Grand Total Particulars Waxing Rate per Die 325.00 220.00 350.00 168.00 200.00 100.00 10.00 1373.00 205.95 1578.95 450.00 2028.95 304.34 2333.29

Cost per die = 2333.29 If 1 die contains following number of products then cost per unit: 1 Die contains 10 Products then Per product = 2333.29 / 10 = 233.32 1 Die contains 2 Products then Per product = 2333.29 / 2 = 1166.64
Activity Based Costing Page 48

1 Die contains 100 Products then Per product = 2333.29 / 100 = 23.33 Activity Based Costing V/s. Traditional Costing:We are assuming the two products for comparison. The Thirumala Precicasts Pvt. Ltd produces two types of products. One surgical parts and the other is defence parts. The same equipment is used to produce the parts in different runs. Between batches, the equipment is cleaned, maintained, and set up in the proper configuration for the next batch. The surgical parts are packaged with two parts per package, and the defence parts are packaged one per package. During the year, Thirumala Precicasts Pvt. Ltd expects to make 10,00,000 surgical parts and 20,00,000 defence parts. The overhead costs incurred have been allocated to activity pools as follows:

Purchasing of materials Setup of machines Packaging Testing Cleaning and maintenance Total overhead costs

200,000 350,280 300,000 270,000 288,540 14,08,820

By analyzing the activity pools, the accountants and production managers have identified the cost drivers, estimated the total expected units for each product, and calculated the unit cost for each cost driver.

Activity Based Costing

Page 49


Cost Driver

Total Expected Units for Cost Driver (1) 100

Total Cost (2)

Unit Cost per Cost Driver (3) = (2) (1) 2,000.00

Purchasing of Materials Set up of Machines Packaging

purchase orders setups containers filled tests of runs


252 25,00,000

350,280 300,000

1,390.00 0.12

Testing Cleaning and maintenance

3,000 252

270,000 288,540

90.00 1,145.00

The activity by product is shown in the following table. Expected Use Activity Cost Driver purchase orders setups Unit Cost (3) 2,000.00 1,390.00 Surgical Parts(4) 50 126 Defence Parts(5) 50 126 ABC Cost Assigned Surgical Defence Parts(3)*(4) Parts(3)*(4) 100,000 175,140 100,000 175,140

Purchasing Set up


containers filled tests







90.00 1,145.00

1,000 84

2,000 168

90,000 96,180

180,000 192,360

Cleaning runs and maintenance Totals



Activity Based Costing

Page 50

To calculate the per unit overhead costs under ABC, the costs assigned to each product are divided by the number of units produced. In this case, the unit cost for a Surgical Part is 0.52 and the unit cost for a Defence Part is 0.44.

Overhead costs assigned to surgical parts Number of surgical parts Overhead costs assigned to defence parts Number of defence parts


10,00,000 887500 20,00,000


Under the traditional method of allocating overhead based on direct labor cost, the total costs for all parts would be divided by total direct labor costs for all parts to determine the per unit cost. Estimated direct labor costs for the year are 15,12,000, of which 378,000 is for surgical parts and 11,34,000 is for defence parts. The per unit direct labor costs are 0.38 for surgical parts (378,000 1,000,000) and 0.57 for defence parts (11,34,000 20,00,000). The per unit cost to produce parts is calculated in two steps: 1. Calculate the predetermined overhead rate by dividing total overhead costs by total direct labor costs. 2. Allocate overhead to each type of product by multiplying the overhead cost per direct labor cost by the per unit direct labor cost for surgical parts and for defence parts. Step 1:- Calculate overhead per direct labour cost Total overhead costs Total direct labour cost 14, 08,820
0.932 Per direct labour cost

15, 12,000

Activity Based Costing

Page 51

Step 2:- Allocation of overhead Overhead cost per direct labour * per unit direct labour cost Surgical parts:0.932 * 0.378 = 0.352 Overhead per unit Defence parts:0.932 * 0567 = 0.528 Overhead per unit A comparison of the overhead per unit calculated using the ABC and traditional methods often shows very different results: Thirumala Precicasts Pvt. Ltd companies overhead per unit

ABC Method Surgical part Defence part 0.52 0.44

Traditional Method 0.35 0.53

0.6 0.4 0.2 0

0.52 0.35 0.44


ABC Method Traditional Method

Surgical Parts Defence Parts

The overhead charged to the surgical part using ABC is 0.52 and much higher than the 0.35 calculated under the traditional method. The 0.52 is a more accurate cost for making decisions about pricing and production. For the Defence part, the overhead
Activity Based Costing Page 52

calculated is 0.44 per unit using the ABC method and 0.53 per unit using the traditional method. The reason for the differences is the traditional method determines the cost allocation using direct labor cost only, so a product with high direct labor cost gets allocated more of the overhead costs than a product with low direct labor cost. The number of orders, setups, or tests the product actually uses does not impact the allocation of overhead costs when direct labor costs are used to allocate overhead. ABC provides a way to allocate costs more accurately when overhead costs are not incurred at the same rate as direct labor cost. The more activities identified the more complex the costing system becomes. Computer systems are needed for complex ABC systems. Some companies limit the number of activities used in the costing system to keep the system manageable. While this approach may result in some allocations being arbitrary, using ABC does provide a more accurate estimate of costs for use in making management decisions. Companies Products and cost estimations for each Activity:Following are some of the products of the company where the cost estimation is made and the percentage of cost involved in the activities of the products. Particulars:These are the activities involved in production process. Last Price:This price indicates last financial year production cost. Quoted Price:This price is the estimated cost for next financial year. Following tables shows the cost estimations of the product and the cost involved in each activities in the process.

Activity Based Costing

Page 53


Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 16.32% Sub Total CST 4 % Total Rate

Last Price


Quoted Price

Increase In Percentage Percentage

32.522 22.469 4.139 59.130 8.870 68.000

55% 38.00% 7.00% 59.13 15.00%

55.044 38.03 7.006 100.08 15.012 115.092

55.00% 38.00% 7.00% 100.08 15.00%

69.2542 69.2542 69.2542

0.000 68.000 11.098 79.097 3.164 82.261

3.45276 118.545 9.768 128.313 5.133 133.445

Activity Based Costing

Page 54

60 50 40 30 20 10 0 Last Price Quoted Price

Interpretation:For producing the arm various factors should be considered.16.32% is the amount which is charged as the excise duty. CST is charged depending on the state where it is supplied.

Activity Based Costing

Page 55

HOLDER Increase In Percentage Percentage 55.00% 38.00% 7.00% 1481.72 15.00% 20.3869 20.3869 20.3869

Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 8.24% CST 4 %

Last Price 676.940 467.704 86.156 1230.800 184.620 1415.420

Percentage 55% 38.00% 7.00% 1230.8 15.00%

Quoted Price 814.947 563.054 103.721 1481.722 222.258 1703.98

0.000 1415.420 116.631 61.282

51.119 1755.1 144.62 75.989

Activity Based Costing

Page 56

900 800 700 600 500 400 300 200 100 0

Last Price Quoted Price

Interpretation:Here the excise duty for the holder is reduced to 8.24%. And the CST(Central Sales Tax) is charged same as the arm which is 4%.

Activity Based Costing

Page 57

CARRIAGE Increase In Percentage Percentage 55.00% 38.00% 7.00% 608 15.00% 26.6667 26.6667 26.6667

Particulars Percentage Raw 264.000 55% Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 16.48% Sub Total CST 4 % Total Rate 182.400 33.600 480.000 72.000 552.000 38.00% 7.00% 480 15.00%

Last Price

Quoted Price 334.4 231.04 42.56 608 91.2 699.2

0.000 552.000 90.970 642.970 19.289 662.259

20.976 720.176 59.343 789.519 31.181 810.699

Activity Based Costing

Page 58

350 300 250 200 150 100 50 0 Last Price Quoted Price

Interpretation:Here the excise duty for the Carriage is reduced to 16.48% as compared to the arm. And the CST (Central Sales Tax) is charged same as the arm which is 4%.

Activity Based Costing

Page 59

CATCH BODY Increase In Percentage Percentage 55.00% 38.00% 7.00% 131 15.00% 9.16667 9.16667 9.16667

Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 8.24% Sub Total CST 4 % Total Rate

Last Price 66.000 45.600 8.400 120.000 18.000 138.000

Percentage 55% 38.00% 7.00% 120 15.00%

Quoted Price 72.05 49.78 9.17 131 19.65 150.65

0.000 138.000 11.371 149.371 4.481 153.852

4.5195 155.17 12.786 167.955 6.718 174.674

Activity Based Costing

Page 60

80 60 40 20 0 Last Price Quoted Price

Interpretation:Total amount is calculated by adding all the activities cost as well as overhead costs. Here the excise duty for the Catch Body is charged to 16.48%. And the CST (Central Sales Tax) is charged same as the arm which is 4%.

Activity Based Costing

Page 61

Last Price 89.914 62.122 11.444 163.480 24.522 188.002 Quoted Price 119.268 82.403 15.18 216.85 32.528 249.378 Increase In Percentage 32.6462 32.6462 32.6462

Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 16.48% Sub Total CST 4 % Total Rate

Percentage 55% 38.00% 7.00% 163.48 15.00%

Percentage 55.00% 38.00% 7.00% 2.1685 15.00%

5.640 193.642 31.912 225.544 6.667 232.321 8.24%

7.4813 256.859 21.165 278.024 11.121 289.145

Activity Based Costing

Page 62

120 100 80 60 40 20 0 Last Price Quoted Price

Interpretation:The future cost is estimated by looking at the present year cost. Here the excise duty for the Carrier is charged to 16.48%. And the CST (Central Sales Tax) is charged same as the arm which is 4%.

Activity Based Costing

Page 63

Last Price 238.172 164.555 30.313 433.040 64.956 497.996 Quoted Price 299.448 206.891 38.112 544.45 81.668 626.118 Increase In Percentage 25.7274 25.7274 25.7274

Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 16.48% Sub Total CST 4 % Total Rate

Percentage 55% 38.00% 7.00% 433.04 15.00%

Percentage 55.00% 38.00% 7.00% 544.45 15.00%

0.000 497.996 82.070 580.066 17.402 597.468

18.7835 644.901 53.14 698.041 27.922 725.963

Activity Based Costing

Page 64

300 250 200 150 100 50 0 Last Price Quoted Price

Interpretation:The cost of the Product may increase depending on the raw material used in production process and the complexity of the production. Here the excise duty for the Carrier is charged to 16.48%. And the CST (Central Sales Tax) is charged same as the arm which is 4%.

Activity Based Costing

Page 65

Last Price 923.043 637.739 117.478 1678.260 251.739 1929.999 Quoted Price 1079.914 746.122 137.444 1963.48 294.522 2258.002 Increase In Percentage Percentage 55.00% 38.00% 7.00% 1963.48 15.00% 16.995 16.995 16.995

Particulars Raw Material Process Overheads Sub Total Margin Total Packaging 3% Sub Total 14.42% Sub Total CST 4 % Total Rate

Percentage 55% 38.00% 7.00% 1678.26 15.00%

57.89997 1987.899 286.855 2274.554 68.237 2342.791

67.7401 2325.742 191.641 2517.383 100.695 2618.079

Activity Based Costing

Page 66

1200 1000 800 600 400 200 0 294.522 286.855 251.739 191.641 137.444 117.478 100.695 67.7401 68.237 57.89997 Last Price Quoted Price 1079.914 923.043 746.122 637.739

Interpretation:The cost of the brake is the highest cost in all the products. Here the excise duty for the Carrier is charged to 14.42% which is comparatively less. And the CST (Central Sales Tax) is charged same as the arm which is 4%. In this way the cost is estimated for each product by calculating the cost of each activity and the size of the production.

Activity Based Costing

Page 67

This study has been taken up with main intention of analyzing the Activities and Cost incurred on each Activity of Thirumala Precicasts Pvt. Ltd, Solapur. The finding is results of analyzing the data of the Company and the Activities involved in the Companies Process. The brief description of the finding of the study is given below: 1. All the Activities starting from customer contact to product shipment are taken into consideration. 2. Overhead allocations are considered which are categorized under: a. Expense categories b. Activities c. Products 3. As per the cost element table, Raw material cost approximately 55.44% of total production cost which is the major cost in production process. 4. According to expense category table, higher cost is consumed by the interest which is approximately Rs.1737057. So company needs to reduce the cost of interest. 5. The actual cost of production required for producing the product with respect to die is considered which includes: a. Fixed cost of production b. Cost required for each shop floor activity. 6. Changes in the fixed cost will automatically impact on the change in the cost of final product.

Activity Based Costing

Page 68

E.g. 1 Die = 10 Products 1 Die = 2 Products 1 Die = 100 Products So the fixed cost may vary depends on the size of product. 7. The overhead charged to the surgical part using ABC is 0.52 and much higher than the 0.35 calculated under the traditional method. The 0.52 is a more accurate cost for making decisions about pricing and production. 8. Companies products and their cost estimation is done with respect to the products like, Arm, Carrier, Carriage, Lower link, Brake, etc.

Activity Based Costing

Page 69


1. The project was completed in 60 days which was a very short period.

2. Because of confidentiality, the data provided by the company is insufficient for my Analytical research.

3. Due to short duration only few Products are studied in this project.

4. Because of Complexity the figures are rounded off.

5. Comparison is done between only two Products.

Activity Based Costing

Page 70


1. The company needs to reduce the contribution cost which ultimately results in contribution ratio. 2. The cost incurred on interest is comparatively high so the company needs to pay the bank loan as early as possible. 3. The company has to reduce the office expenses which are increasing the cost of the product. 4. Company has to improve the quality of its product which ultimately results in low rejection rate. 5. The company has to increase the production capacity then the fixed cost will be reduced which results in increase in sales volume. In this way the future of the company is depend on both i.e. Quality and Quantity. The decrease in the cost of each activity will automatically reduce the cost of the product which ultimately results in high sales.

Activity Based Costing

Page 71


Activity based costing is a different way of looking at an organization's costs in order to optimize profit margins. If ABC is implemented with the correct understanding for the correct purpose, it can return a great long-term value to the organization. Activity based cost management has more advantages than limitations. When implemented properly, activity based cost management can bring about constructive changes in financial control systems. For instance, when you carry out planning / budgeting with activity based costing you can always have more accurate estimations done. You can always work-out where your estimations went wrong, since you know what each activity contributed in your planning / budgeting. However, the true benefit of activity based cost management is not that it is an improvement upon the existing accounting system. Activity based accounting provides the structure for the establishment of a true management-oriented system and therein lies its true benefit.

Activity Based Costing

Page 72


The following reports & books are referred for working out this project report. 1. Companies Annual Report 2009-2010 And cost sheet.

2. Strategic Financial Management by G. P. Jakhotiya

3. Companies Audit Report by Aherkar (C.A.)





Activity Based Costing

Page 73