ABC costing

Primary Introduction of ABC costing

1. Activity Based Costing (ABC) Conducted by Mr . S. B. Bansode

2. Meaning and Definition Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. ABC is based on George Staubus Activity Costing and Input-Output Accounting. The concept of ABC was developed in the manufacturing sector of the United States during 1970s and 1980s. During this time the Consortium for Advanced Management-International (CAM-I), provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing. Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services. ABC is a systematic, cause-and-effect method of assigning the cost of activities of products, services, customers, or any cost object. According to Cooper and Kalpan , ABC is defined an, “ABC system calculates the cost of individual activities and assigns cost to cost objects such as product and services on the basis of activities undertaken to produce each product or services”.

3. Importance of ABC Cost are pooled not on the basis of departments but according to the activities involved in the production.  It charges overhead cost to product according to activities involved in the product instead of using average overhead distribution rate as in case of traditional method. It leads to more accurate cost information because of easy traceability of cost according to activities cost driver.  It helps in eliminating non-value added activities thereby reducing the per unit cost of product. Thus, it helps in cost control. It results in more accurate cost calculation of a product or job.

4. Characteristics of ABC Activity based: The ABC system is based on activities. Activities consist of different functions that are associated with cost objects. Activity cost center: This is also called cost pool—the overhead cost is identified to an activity and assigned to each activity cost center. Use of cost drivers: The causes of occurrence of overheads are called cost drivers. These are used to assign costs to products. Accumulation of overhead costs: Accumulation of overheads is done on the basis of various activities. A single unit—the entire organization—is not taken into account. No blanket rate is applied. Traceability: Overhead costs can be traced easily. Hence, cost data are more reliable and accurate. ABC

5. Steps involved in ABC Identifying the Activities. Determining Cost Pool/Cost Centres for Each Major Activity. Determining Cost Driver for Each Major Activity. Calculation of Activity Cost Driver Rate. Charging Activity Cost to the Product Cost.

6. ABC V/s Traditional Costing Points Traditional Costing ABC Costing Meaning It means allocation of factory overheads to product on volume of production resources consume ABC means that costing which helps you in find necessary total cost to make a product Overhead rate Help you in ascertain cost of production (COP). Help you in ascertain cost of production (COP) & other object cost also Suitable Suitable for labour intensive Suitable for Capital intensive Decision making Due to the incapability of allocation it creates problems in decision making Due to easy allocation it creates support to best decision. Expensive It is less expensive It is very Expensive Scope It has narrow scope It has broad scope Types of Activities Two Activities :- 1. Unit level 2. Facility level All Activities: 1. Unit level 2. Batch level 3. Process level 4. Facility level

7. Requirements of ABC system Profitability Cost Accounting Cost of product Examining of Costing System Cost of Manufacturing Allocation of overhead Cost of Marketing

8. Problems with the ABC Expensive and Complex Less useful to Smaller Firms Measurement Difficulties Selection of Cost drive Difficult to implement in service industry

9. Thank You…