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Presented By: Ruchi Kumari Payal Patel

. y It aims to rectify the problem of inaccurate cost information due to selection of wrong bases of indirect cost apportionment. jobs and processes.MEANING y A new and scientific approach developed by Cooper and Kalpan(1988) for assigning overhead to end products.

.DEFINITION y In the words of Cooper and Kalpan. ABC systems calculate the costs of individual activities and assign costs to cost objects such as product and services on the basis of activities undertaken to produce each product or service.

.OBJECTIVES These objectives can be grouped in three parts : y y y Product and Customer Profitability Process and cost improvements Resource planning.

departments and activities. y It helps to find unnecessary costs. departments and activities. y It helps to control the costs at an individual level and on a departmental level.USES y It helps to identify inefficient products. y It helps to allocate more resources on profitable products. . y It helps fixing the price of a product or service scientifically.

y Products do not consume costs directly y Money is spent on activities y Activities are consumed by product/services .BASICS OF ABC y Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product.

. y The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business.y ABC assigns Costs to Products by tracing expenses to activities . Each Product is charged based on the extent to which it used an activity.

. products. business processes. y It recognizes that many organisational resources are required not for physical production of units of product but to provide a broad array of support activities. customers.y Provides ways of assigning the costs of indirect support resources to activities.

. Examples : placing of a purchase order.TERMS USED IN ABC y Activity An activity may be defined as a particular task or unit of work with a specific purpose. y Cost Pool It is grouping of individual cost items. after sales service etc.

y Cost Driver It is a factor that causes a change in the cost of an activity.y Cost Objects It is an item for which cost measurement is required. For example: a product. These are of two types. a service. are cost objects. .resource cost driver and activity cost driver. a job or a customer etc.

It is used to assign the cost of a resource to an activity or cost pool. .y Resource Cost Driver It is a measure of the quantity of resource consumed by an activity. It is used for assigning activity costs to cost objects consuming the activity. y Activity Cost Driver It is a measure of the frequency and intensity of demand placed on the activities by cost objects.

STEPS IN ACTIVITY BASED COSTING y Identification of the main activities. y Calculation of the activity cost driver rate. . y Determination of the activity cost drivers. y Charging the costs of activities to products. y Creation of cost pool.

Enter Activity Driver Qty. Calculate Costs .Building an ABC Model Identify Resources Identify Activities Identify Cost Objects Define Activity Drivers Define Resource Drivers Enter Resource Costs Enter Resource Driver Qty.