ACTIVITIES

Activities can be defined as a named process, function, or

task that occurs over time and has recognized results.
Activities use up assigned resources to produce products
and services. Inputs are transformed into outputs under the
perimeters set by controls performed by the organization's
employees and their tools. Activities can be perceived as
consumers of resources in production of materials, services,
events, or information. Activities are the common
denominator between business process improvement and
information improvement.
 Activity-Based Management
Activity-based management aims to improve the value
received by customers and to improve profits by identifying
opportunities for improvements in strategy and operations.

A value-added cost is the cost of an activity that cannot be

eliminated without affecting a product’s value to the customer.

In contrast, non-value-added costs are costs that can be

eliminated without affecting a product’s value to the customer.

Examples of Non Value Added Activities: Move Time,

Waiting Time, Processing Time, Inspection Time, Storage Time
 ACTIVITY-BASED MANAGEMENT MODEL

Resources COST ASSIGNMENT

VIEW

PROCESS VIEW

Driver Performance
Activities
Analysis Analysis
CAUSES

Products &
Customers COST OBJECTS
 ACTIVITY-BASED COSTING (ABC)
Activity-based costing is a costing model that identifies the cost
pools, or activity centres, in an organization and assigns costs to
products and services (cost drivers) based on the number of events
or transactions involved in the process of providing a product or
service.
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 organization regardless
of the organizational structure.
*ABC is a powerful tool for measuring business performance,
determining the cost of business process outputs, and is used as a
means of identifying opportunities to improve business process
effectiveness and efficiency.
ACTIVITY-BASED COSTING : OVERVIEW

Data

General A
Data B Information
Ledger
C

ABC acts as
a translator
 HOW IS ABC DIFFERENT FROM TRADITIONAL
COST ACCOUNTING?
ABC COSTING TRADITIONAL METHOD

• Assumption: services and • Assumption:product and

products consume activities, services consume resources
activities consume resources
• Activities are considered the • Not fit for program costing,
basic cost object but rather for facility based
• Expenses should be separated costing
and matched to the level of
activity that consumes the
resources
Traditional Costing ABC

Mfg O/H Mfg O/H

Cost Pool Cost Pool

Activity 1 Activity 2 Activity 3

Product 1 Product 2 Product 3

Product 1 Product 2 Product 3
 Traditional Cost System
Direct Direct All All
Material Labor Indirect Unallocated
Resource Resource Resources Value Chain
Costs

Direct Direct
Trace Trace Cost
Driver

Products Unallocated
 Two-Stage Activity-Based
Cost System
Direct Direct Other Indirect Indirect All
Material Labor Direct Resource Resource Unallocated
Resource Resource Resources A Z Value Chain
Costs

Direct Direct % % % %
Trace Trace Activity Activity
1 10
Cost Cost
Driver Driver

Products Unallocated
 COMPARISON
General Ledger View
Course 1 Course 2
Payroll $8,000 $8,000
Other $2,000 $2,000
Total Cost $10,000 $10,000

ABC View
Design Develop Deliver Total
Course 1 $4,000 $3,000 $3,000 $10,000
Course 2 $2,000 $4,000 $4,000 $10,000
 PROCEDURE : ABC
• Identify significant activities
• Assign O/H costs to activity cost pools.
• Find the cost driver for each activity.
• Compute the cost rate for each activity
cost pool.
• Allocate activity costs to each product
using the cost rate.
 Designing & Implementing ABC System

Identify the steps involved in the design and

implementation of an activity-based costing system.

Step 1 Step 2
Determine cost of Develop a process-based
activities, resources, map representing the flow
and related cost of activities, resources, and
drivers. their interrelationships.
 Step 3
Collect relevant data concerning costs and the
physical flow of the cost-driver units among
resources and activities.
Step 4
Calculate and interpret the new activity-based
information.

Using an activity-based costing system

to improve the operations of an orgn. is
activity-based management (ABM).
Understanding the relationships among activities, resources,
costs, and cost drivers is the key to understanding ABC and
how ABC facilitates managers’ understanding of operations.

EXAMPLE OF ACTIVITIES AND COST DRIVERS

Activities: Cost Drivers:

Account billing No. of lines
Bill verification No. of accounts
Account iniquity No. of labor hours
Correspondence No. of letters
EXAMPLE OF ACTIVITIES AND COST DRIVERS

Activities: Cost Drivers:

Purchasing material No. of orders placed
Warehousing Items in stock
Packing No. of packing orders
Inspection Inspection per item
Receiving material No. of receiving orders
 Activity-Based Costing

Two
Two pieces
pieces of
of
information
information are
are
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required toto compute
compute
the
thecost-driver
cost-driverrate:
rate:
••Activity
ActivityCost
Cost
••Activity
Activity Volume
Volume

EXAMPLE
EXAMPLE
EXAMPLE-1
EXAMPLE -1
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 ABC:Benefits & Costs
Benefits
•Accurate Costing
•Activity Evaluation
•Value-Added Activity
•Non-Value-Added Activity
•Better Cost Control

Costs
•Costly Implementation
•Costly Maintenance