GROUP 6 SAPMBA PROJECT FOR SYSTEM ACCOUNTING AND PRINCIPAL MANAGEMENT

Certainly! Let's delve into another important aspect related to cost accounting: **activity-based costing (ABC)**.

### Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to products and services based on their actual consumption. Unlike traditional costing methods that allocate costs based on direct labor or machine hours, ABC provides a more accurate way to allocate indirect costs by considering the activities that drive those costs. This approach is particularly useful in environments where overhead costs form a significant portion of total costs and where there is a diverse range of products or services with varying levels of complexity.

### How ABC Works

ABC involves several key steps:

1. **Identifying Activities**: Activities are identified across different functions or departments that consume resources.

2. **Assigning Costs to Activities**: Costs are allocated to each activity based on the resources consumed.

3. **Determining Cost Drivers**: Cost drivers, which are factors that directly influence the cost of an activity, are identified.

4. **Assigning Costs to Products/Services**: Costs from each activity are then allocated to products or services based on their use of these activities.

5. **Analysis and Decision-Making**: Managers can use ABC data to analyze profitability, optimize resource allocation, and make informed decisions about pricing, product mix, and process improvements.

### Benefits of ABC

ABC offers several advantages over traditional costing methods:

- **Accurate Cost Allocation**: By directly linking costs to activities and cost drivers, ABC provides more accurate cost information, which improves decision-making.

- **Better Cost Management**: Managers can identify and manage costs more effectively by understanding the specific activities that contribute to overhead costs.

- **Improved Profitability Analysis**: ABC helps in identifying profitable and non-profitable products or services, allowing companies to focus on high-margin offerings.

- **Enhanced Budgeting and Planning**: With detailed cost information, companies can develop more precise budgets and forecasts.

### Challenges of Implementing ABC

While ABC provides valuable insights, its implementation can be challenging:

- **Resource Intensive**: Implementing ABC requires significant time and resources to identify activities, collect data, and establish cost drivers.

- **Complexity**: Managing the complexity of ABC systems, especially in large organizations with diverse product lines and activities, can be daunting.

- **Resistance to Change**: Employees and managers accustomed to traditional costing methods may resist the shift to ABC due to its unfamiliarity and perceived complexity.

Real-World Applications

Many industries, such as manufacturing, healthcare, and services, use ABC to improve cost management and profitability

1. ECONOMIC ANALYSIS India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships. India’s gross domestic product (GDP) at current prices stood at Rs. 51.23 lakh crore (US$ 694.93 billion) in the first quarter of FY22 and India is the fourth-largest unicorn base in the world with over 21 unicorns collectively valued at US$ 73.2 billion. The first Union Budget of the third decade aimed at energising the Indian economy through a combination of short-term, medium-term and long-term measures and In the Union Budget 2021-22, capital expenditure for FY22 is likely to increase to increase by 34.5% at Rs. 5.5 lakh crore over FY21 (BE) to boost the economy. India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025 and It is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by 2040 as per a report by PricewaterhouseCoopers.

2. INDUSTRY ANALYSIS – AVIATION INDUSTRY The civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last three years. India has become the third largest domestic aviation market in the world and is expected to overtake UK to become the third largest air passenger market by 2024. India’s passenger traffic stood at 115.37 million in FY21. Domestic passenger and international passenger traffic declined at a CAGR of -9.02% and -28.64%, respectively, from FY16 to FY21, owing to COVID-19-related restrictions on flights in FY21. India’s aviation industry is expected to witness Rs. 35,000 crore (US$ 4.99 billion) investment in the next four years. The Indian Government is planning to invest US$ 1.83 billion for development of airport infrastructure along with aviation navigation services by 2026. India’s aviation industry is largely untapped with huge growth opportunities, considering that air transport is still expensive for majority of the country’s population, of which nearly 40% is the upwardly mobile middle class.

3. COMPANY ANALYSIS InterGlobe Aviation Ltd [ Indigo ] The company’s strengths are it has an efficient Cash Conversion Cycle of -16.17 days. Plus, The company has a high promoter holding of 74.78% and it has a strong degree of Operating leverage, Average Operating leverage stands at 4.43. The company’s minus points are it has shown a poor profit growth of -237.50% for the Past 3 years. The company has shown a poor revenue growth of -14.00 and it has a poor ROE of -66.56% over the past 3 years. Global Vectra Helicorp Ltd The company’s strengths are it has an efficient Cash Conversion Cycle of -62.69 days and it has a high promoter holding of 75%. The c ompany has a poor ROE of -10.43% over the past 3 years and company has a poor ROCE of 0.30% over the past 3 years. Plus, Company has low Interest coverage ratio of -1.56.

4. Key ratios of InterGlobe Aviation Ltd Growth in stock price vs Growth in earning ratio are 0.64, 0.02, -0.58 and -0.06 for the years 2018, 2019, 2020 and 2021 respectively. Growth in earning vs P/E ratio are 28.87, -11.87, -7.21 and 439.81 for the years 2018, 2019, 2020 and 2021 respectively. [ ] / P/E ratio are 28.87, -11.87, -7.21 and 439.81 for the years 2018, 2019. 2020 and 2021 respectively. Real price of stock adjusting for cash are 1078.68, 981.21, 1322.08 and 1460.74 for the years 2018, 2019, 2020 and 2021 respectively. Profit Margin i.e. are 0.089, 0.097, 0.005, -0.006 and -0.398 for the years 2017, 2018, 2019, 2020 and 2021 respectively.  

5. Key ratios of Global Vectra Helicorp Ltd Growth in stock price vs Growth in earning ratio are -5.55, -4.54, -13.92, 2.13 and -0.06 for the years 2017, 2018, 2019, 2020 and 2021 respectively. Growth in earning vs P/E ratio are 0.228, 0.117, 0.693, -0.140 and 12.03 for the years 2017, 2018, 2019, 2020 and 2021 respectively. [ ] / P/E ratio are 0.22, 0.11, 0.69, -0.13 and 12.03 for the years 2017, 2018, 2019. 2020 and 2021 respectively. Real price of stock adjusting for cash are 220.2, 275.7, 58.3, 87.6 and 81.9 for the years 2017, 2018, 2019, 2020 and 2021 respectively. Profit Margin i.e. are -0.12, 0.006, 0.015, -0.002 and 0.08 for the years 2017, 2018, 2019, 2020 and 2021 respectively.  

6. Intrinsic Value InterGlobe Aviation Ltd [ Indigo ] The Intrinsic value of it using Dividend Discount Model is 6057.88 which is 207% more than market value of it on 4 th February. Here, Present value of 5 years dividend is 9.60 Rs and Present value of expected selling price is 6048 Rs. Cost of equity using CAPM is 12.81%. Global Vectra Helicorp Ltd The Intrinsic value of it using Dividend Discount Model is 72.36 which is 24.2% more than market value of it on 4 th February. Here, Present value of 5 years dividend is 3.04 Rs and Present value of expected selling price is 69.311 Rs. Cost of equity using CAPM is 16.30%. PREPARED BY : SAIYED M.HASIM [101074] & FARHAN MANSURI [101034]