Académique Documents
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Costing Systems
PREPARED FOR,
MD MOIN UDDIN
LECTURER, FBS, BUP
OUTLINE
WHAT IS ACTIVITY BASED COSTING?
WHY ABC IS NEEDED?
TWO STAGE ACTIVITY BASED COSTING METHOD
IMPLEMENTATION EXAMPLE
ADVANTAGES
DISADVANTAGES
IMPLEMENTATIUON CHALLENGES
Activity-based
Activity-based costing
costing (ABC)
(ABC) involves
involves
determining
determining the
the cost
cost of
of activities
activities and
and
tracing
tracing their
their costs
costs to
to cost
cost objectives
objectives on
on the
the
basis
basis of
of the
the cost
cost objectives
objectives utilization
utilization of
of
units
units of
of activity.
activity.
Manufacturing Cost
Hierarchy
Unit level activities
Batch level activities
Product level activities
Facility level activities
Manufacturing Cost
Hierarchy
This
This activity
activity is
is
performed
performed for
for
each
each unit
unit of
of
product
product
produced
produced and
and
sold.
sold.
Unit Level
Examples
Cost of raw materials
Cost of inserting a
component
Utilities cost of
operating equipment
Some costs of
packaging
Manufacturing Cost
Hierarchy
Batch Level
Examples
Cost
Cost of
of processing
processing sales
sales
order
order
Cost
Cost of
of issuing
issuing and
and
tracking
tracking work
work order
order
Cost
Cost of
of equipment
equipment setup
setup
Cost
Cost of
of moving
moving batch
batch
between
between workstations
workstations
Cost
Cost of
of inspection
inspection
This
This activity
activity is
is
performed
performed for
for
each
each batch
batch of
of
product
product produced
produced
or
or sold.
sold.
Manufacturing Cost
Hierarchy
Product Level
Examples
Cost of product
development
Cost of product
marketing, such as
advertising
Cost of specialized
equipment
Cost of maintaining
specialized
equipment
This
This activity
activity is
is
performed
performed to
to support
support
each
each different
different product
product
that
that can
can be
be produced.
produced.
Manufacturing Cost
Hierarchy
Facility Level
This
This activity
activity is
is
performed
performed to
to
maintain
maintain general
general
manufacturing
manufacturing
capabilities.
capabilities.
Examples
Cost of maintaining general
facilities
Cost of non-specialized
equipment
Cost of maintaining nonspecialized equipment
Cost of real property taxes
Cost of general advertising
Cost of general administration
type of variable
cost is considered:
Unit level
Volume-Based Unit
Level Analysis
Fixed: Costs that do not
vary with the number of
units
Facility level
activities
Facilities level
activities
1.
Practical
Practical Advice
Advice for
for Implementing
Implementing
ABC
ABC
Capture the attention of top management
.
2.
10.
Implementation of
Activity Based Costing (ABC)
and
Traditional
Cost Accounting (TCA) Methods
in an
Automobile Parts Manufacturing
Company:
A Case Study
Current status:
Object
Part A
Part B
Part C
Material cost
400
250
300
3.7
4.5
Annual quantity
18000
16000
18500
Selling Price/each
1200 each
850 each
1150 each
Direct labour
1,67,50,000.00
(b)
Direct material
24,58,000.00
(c)
35,43,650
Fringe benefits
9,48,328
Utilities
5,17,837
Income tax
1,58,121
Equipment rental
4,30,491
Postage
31,195
Depreciation
2,93,233
Property tax
74,868
Maintenance
1,18,541
Property insurance
56,151
Tools
93,585
= (18,000 5)
= 90,000 hrs
Part B
= (16,000 3.7)
= 59,200 hrs
Part C
= (18,500 4.5)
= 83,250 hrs
= 2, 32,450 hrs
= (1,67,50,000/2,32,450)
= 72.05 /hr
= 62,66,000
= (62,66,000.00/2,32,450)
=26.95 /hr
Expenses
Part A
Part B
Part C
Direct material
400
250
300
Direct labour
(72.054.5) = 324.23
Overhead
Total cost
(72.053.7) =
266.59
(26.953.7) =
99.72
616.31
Price
850
1150
Margin
305
Margin %
25.41
(72.055) =
360.25
(26.955) =
134.75
895
1200
233.69
27.50
(26.954.5) =
121.28
745.51
404.49
35.18
Machine hours/unit
3.7
4.5
Material cost/unit
400
350
200
Labour hours/unit
3.7
4.5
18,000
16,000
18,500
Selling price/part
1,200
850
1,150
Sr.
No.
Object
Part A
Part B
Part C
Total
Customer orders
1,800
2,000
2,500
63,00
Parts manufactured
18,000
16,000
18,500
52,500
Work orders
110
100
120
330
Set-ups
110
100
120
330
Activities
Activity
cost
Activity driver
Quantity
Processing orders
15,03,840
No. of orders
6,300
Scheduling orders
12,53,200
Set-up machines
17,54,480
No. of set-ups
330
Inspection lots
10,02,560
No. of lots
330
Shipping part
7,51,920
No. of shipments
6,300
Activities
Processing
orders
Scheduling
orders
Set-up machines
Inspection lots
Cost/unit
238.70
3,797.57
5,316.60
3,038.06
119.35
% of Activity
cost
24%
20%
28%
16%
Activity Costs :
Part A
Part B
Part C
Sr. Activity
No
Cost
Vol.
Total
Cost
Unit
Cost
Vol.
Total
Cost
Unit
Cost
Vol.
Total
Cost
Unit
Cost
Processing
Orders
238.70
1,80
0
4,29,66
0
23.87
2,00
0
4,77,4
00
29.83
2,50
0
5,96,75
0
32.25
Scheduling
Orders
3,797.5
7
110
4,17,73
2.7
23.20
100
3,79,7
57
23.73
120
4,55,70
8.4
24.63
Set-up
machines
5,316.6
0
110
5,84,82
6
32.49
100
5,31,6
60
33.22
120
6,37,99
2
34.48
Inspection
lots
3,038.0
6
110
3,34,18
6.6
18.56
100
3,03,8
06
18.98
120
36,45,6
7.2
19.70
Shipping
parts
119.35
1,80
0
2,14,83
0
11.93
2,00
0
2,38,7
00
14.91
2,50
0
2,98,37
5
16.12
Expenses
Part A
Part B
Part C
(1)
Direct material
400
250
300.00
(2)
Direct labour
360.25
266.59
324.23
(3)
110.05
119.67
127.18
(4)
870.03
636.26
751.41
(5)
Selling price
1200
850
1150
(6)
Margin{=(5)-(4)}
329.97
213.74
398.59
(7)
Margin %
27.49%
25.14%
34.66%
COMPARISON
PART
Selling
price
TCA
cost
TCA
margin
TCA
margin%
ABC
cost
ABC cost
margin
ABC cost
margin%
Part
A
1,200
895
305
25.41%
870.03
329.97
27.49%
Part
B
850
616.31
233.69
27.50%
636.26
213.74
25.14%
Part
C
1,150
745.51
404.49
35.18%
751.41
398.59
34.66%
ADVANTAGES
Accurate costing.
Better understanding.
Utilizes unit cost.
Integrates with Six Sigma.
Better control
Supports performance management
Helps in benchmarking
DISADVANTAGES
Big Budget.
Maintenance Cost
Creates confusion
Misinterpretation
Do not conform to GAAP
IMPLEMENTATION CHALLANGES
The initiative to implement ABC system must be strongly
supported by the management. The workings involve a
tremendous job of making inquiries from employees.
The design and implementation of ABC system should be the
responsibility of a cross functional team of technicians. Normally,
the team would include representatives from accounting,
finance, IT, marketing, production and engineering departments.
Services of an ABC system consultant must be hired in order to
prevent the wastage of resources and time.
Selection of ABC software that could implement and automate
the processing of the system should be made upon expert
advice.
REFERENCES
Cost & Management Accounting by Colin Drury, 5/e
Cost Accounting by Horngren /Datar /Foster, 11/e
Managerial Accounting by Hilton and Platt
Managerial Accounting by Weygandt / Kieso / Kimmel,
2/e
Cima Official Terminology
THANK