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COST ACCOUNTING
TERM PROJECT
ON
FACULTY SUPERVISOR:
SUBMITTED BY:
ROLL NO.
STUTI GULATI NAVYA ANAND MS. ROHINI SINGH SHRUTI SABERWAL EKTA SHARMA AANCHAL SHARMA
ACKNOWLEDGEMENT
We, the students of Shaheed Sukhdev College of Business Studies, make a humble attempt to present our Cost Accounting project. We would like to express a deep sense of gratitude to our teacher, Ms. Rohini Singh for providing unrelenting support for this project. We also avail this opportunity to convey our sincere thanks to all our sources of reference. We hope that this project, with all its contents, will serve its true purpose, cater to the needs of all.
driver could be the number of deliveries. A cost driver is designed to allocate the delivery activity cost pool to the cost objects. The activity driver measures how much of the activity is used by the cost object. Example: Product A is delivered once a month, whereas product B is delivered once a week. Products A and B require a different number of deliveries, hence the cost of the delivery activity should be assigned to each product on the basis of the number of deliveries each uses. The cost object is whatever it is you wish to cost. It could be a product, service, process, job or customer. While traditional costing arbitrarily allocates overhead costs, ABC traces overhead costs by looking at the activities that each product and service calls upon. With ABC the products consume the activities. It is the activities that cost money.
Uses
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It helps to identify inefficient products, departments and activities It helps to allocate more resources on profitable products, departments and activities 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
Limitations
Even in activity-based costing, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
Cost
ABC is considered a relatively costly accounting methodology. Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and costly methods of ABC.
Prevalence
Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's balanced scorecard and economic value added.
ABC has stagnated over the last five to seven years, Kaplan, 1998
Illustration
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Lets illustrate the concept of activity based costing by looking at two common manufacturing activities: (1) The setting up of a production machine for running batches of products (2) The actual production of the units of product. We will assume that a company has annual manufacturing overhead costs of $2,000,000of which $200,000 is directly involved in setting up the production machines. During the year the company expects to perform 400 machine setups. Lets also assume that the batch sizes vary considerably, but the setup efforts for each machine are similar. The cost per setup is calculated to be $500 ($200,000 of cost per year divided by 400 setups per year). Under activity based costing, $200,000 of the overhead will be viewed as a batch-level cost. This means that $200,000 will first be allocated to batches of products to be manufactured (referred to as a Stage 1 allocation), and then be assigned to the units of product in each batch (referred to as Stage 2 allocation). For example, if Batch X consists of 5,000 units of product, the setup cost per unit is $0.10 ($500 divided by 5,000 units). If Batch Y is 50,000 units, the cost per unit for setup will be $0.01 ($500 divided by 50,000 units). For simplicity, lets assume that the remaining $1,800,000 of manufacturing overhead is caused by the production activities that correlate with the companys 100,000 machine hours. For our simple two-activity example, let's see how the rates for allocating the manufacturing overhead would look with activity based costing and without activity based costing: With ABC Mfg overhead costs assigned to setups Number of setups Mfg overhead cost per setup $200,000 Without ABC $0
Total manufacturing overhead costs Less: Cost traced to machine setups Mfg O/H costs allocated on machine hours Machine hours (MH) Mfg overhead costs per MH
$20 per MH
Next, let's see what impact these different allocation techniques and overhead rates would have on the per unit cost of a specific unit of output. Assume that a company manufactures a batch of 5,000 units and it produces 50 units per machine hour, here is how the cost assigned to the units with activity based costing and without activity based costing compares: With ABC Mfg overhead for setting up machine No. of units in batch Mfg O/H caused by Setup Per Unit $500 5,000 $0.10 Without ABC $0 Not applicable Not applicable
Mfg overhead costs per machine hour No. of units produced per machine hour Mfg O/H caused by Production Per Unit
$18 50 $0.36
$20 50 $0.40
$0.46
$0.40
If a company manufactures a batch of 50,000 units and produces 50 units per machine hour, here is how the cost assigned to the units with ABC and without ABC compares: With ABC Mfg overhead for setting up machine No. of units in batch Mfg O/H caused by Setup Per Unit $500 50,000 $0.01 Without ABC $0 Not applicable Not applicable
Mfg overhead costs per machine hour No. of units produced per machine hour Mfg O/H caused by Production Per Unit
$18 50 $0.36
$20 50 $0.40
$0.37
$0.40
As the tables above illustrate, with Activity Based Costing the cost per unit decreases from $0.46 to $0.37 because the cost of the setup activity is spread over 50,000 units instead of 5,000 units. Without ABC, the cost per unit is $0.40 regardless of the number of units in each batch.
CASE STUDY
We know that the hot dog company has monthly overhead costs of Rs. 63,700(see note1)of which Rs. 44,500(see note2) is the manufacturing overhead costs. During the month the company expects to perform at 5 hot dog setups in Delhi. The cost per setup is calculated to be Rs. 8,900 (Rs. 44,500 of cost per year divided by 5 setups per year). Under activity based costing, Rs. 44,500 of the overhead will be viewed as a batch-level cost. This means that Rs. 44,500 will first be allocated to batches of products to be manufactured (referred to as a Stage 1 allocation), and then be assigned to the units of product in each batch (referred to as Stage 2 allocation). Assume that the remaining Rs. 19,200 of manufacturing overhead is caused by the production activities that correlate with the companys 420 working hours.
With ABC(in rs.) Mfg overhead costs assigned to setups(see note2) Number of setups Mfg overhead cost per setup 44,500
Total overhead costs(see note1) Less: Cost traced to machine setups Mfg O/H costs allocated on machine hours Machine hours (MH)(14 hours per day*30) Mfg overhead costs per MH
Rs.152 per MH
The company manufactures a batch of 4200 units(140 hot dogs per day at 5 setups*30 days) and it
produces 10 units per working hour, here is how the cost assigned to the units with activity based costing and without activity based costing compares:
With ABC (in Rs.) Mfg overhead for setting up machine No. of units in batch Mfg O/H caused by Setup Per Unit 8900
Mfg overhead costs per machine hour No. of units produced per machine hour(4200units/420 working hours) Mfg O/H caused by Production Per Unit
46 10 4.6
152 10 15.2
6.6
15.2
NOTES: Note1- Total overheads costs include: Rent Electricity Labor Vegetable oil Packaging Transit costs My can pepsi Soft drinks French fries TOTAL 20000 3000 16000 3000 1500 1000 8400 6300 4500 63700
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Note 2-Total manufacturing costs include: Rent Electricity Labor Vegetable oil Packaging Transit costs TOTAL Note 3-Direct costs include: Buns, sausages etc Sauces(mayonese,mustard,ketchup) Vegetable soya sausage TOTAL 36000 10800 6000 52800 20000 3000 16000 3000 1500 1000 44500
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