Activity Based Costing
Activity-based costing (ABC) is a costing

model that identifies activities in an
organization and assigns the cost of each
activity resource to all products and services
according to the actual consumption by each:
it assigns more indirect costs (overhead) into
direct costs.

Basics of ABC
Cost of a product is the sum of the costs of all

activities required to manufacture and deliver
the product.
Products do not consume costs directly
Money is spent on activities
Activities are consumed by product/services

Benefits of Activity Based Costing Identifying the most and least profitable customers. . departments and activities. products and channels. Identify opportunities to reduce costs and/or increase efficiency It helps to identify inefficient products. departments and activities It helps to allocate more resources on profitable products.

.Benefits contd…… It helps to control the costs at an individual level and on a departmental level It helps to find unnecessary costs It helps fixing price of product or service scientifically Easily identify the root causes of poor financial performance.

people. The resource is what the activity uses to do the work e. . Resources cost money.What’s what in ABC? The activity is the work that is done. services. The and cost of the activity depends on the quantity of resources used to accomplish the activity. equipment.g.

process. The cost driver for an activity is the factor that influences the amount of the resources that will be consumed by this activity. service.CONTD……. The cost object is whatever it is you wish to cost.. It could be a product. The activity driver measures how much of the activity is used by the cost object. job or customer. .

.How Does ABC Works? The first stage in an initial ABC study is to develop a fundamental understanding of the Resources (expenditures) and Activities (work performed) of an organization.

. In the second stage the Resources are then mapped to the Activities. thereby quantifying the cost of performing each of these Activities .Contd….

products. Finally these costs are traced to Cost Objects (customers. or services) providing tremendous insight into where an organization is making and losing money. .Contd…..

2.Determine Activities (work performed) that are supported by Resources. .Identify the Resources (expenditures) of an organization.How to Develop an ABC Model? Developing the initial model consists of the following five steps: 1.

5. 4. Define Cost Objects (products.Contd…… 3. customers).Develop Resource Drivers to link Resources to Activities. Develop Cost Drivers to link Activities to Cost Objects. services. .

Identify Activities In developing an ABC system. the organization identifies the activities being performed: Move material Schedule production Purchase material Inspect items .

Respond to customers Improve products Introduce new products Explore new markets ..Identify Activities contd….

Types Unit Level Batch Level Product Level Customer Level Facility Level .Activities.

ABC:Where to use? High Overheads Product Diversity or Multiple Products Customer Diversity Service Diversity Stiff Competition .

3. . Analysis of activities. 2. Cost data gathering. Establishment of output metrics.Process of ABC Activity-based costing consists of the following steps: 1. Cost analysis. 5. 4. Tracing of costs to activities.

Supply Chain Management SCM is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. . work-in-process inventory. SCM spans all movement and storage of raw materials. and finished goods from point of origin to point of consumption (supply chain).

Process of SCM The process of supply chain management can be divided into three distinct flows: The product flow The information flow The finances flow .

Strategic . Strategic partnerships with suppliers. distributors etc . Strategic network optimization .Activities/Functions of SCM 1. Product life cycle management .

Strategic Functions contd…. Where-to-make and make-buy decisions. . Aligning overall organizational strategy with supply strategy. It is for long term and needs resource commitment.

Tactical Sourcing contracts and other purchasing decisions.Functions of scm contd… 2. Production decisions Inventory decisions .

Tactical Functions Contd…. Transportation strategy Benchmarking of all operations against competitors Milestone payments.. Focus on customer demand .

Operational Daily production and distribution planning Production scheduling Demand planning and forecasting Sourcing planning .Functions of scm contd… 3.

Operational Function Inbound operations Outbound operations Order promising Production operations .

Creation Era 2.Globalization Era .Integration Era 3.Developments in SCM 1.

0 . SCM 2. 5.Developments in SCM contd… 4. Specialization Era  Phase One: Outsourced Manufacturing and Distribution  Phase Two: Supply Chain Management as a Service.

Production Decisions 3.Supply Chain Decisions 1.Location Decisions 2.Transportation Decisions .Inventory Decisions 4.

SCM Business Process Integration Customer service management Procurement Product development and commercialization Manufacturing flow management/support .

Physical distribution Outsourcing/partnerships Performance measurement .SCM business process contd…..