Group Members: Ali Zia Zubash Javed

What is Activity Based Costing Essentials for implementing ABC How ABC make decisions more efficient Intro of case study Discussion Questions of the case study

Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into direct costs.

Involvement of top leadership Responsibility of cross functional teams Evaluation and rewards based on ABC

Identify activities and resources Measure the costs of resources used to perform each activity Determine cost drivers and resource Assign activity costs to products by multiplying the use of the cost drivers by the resource-consumption rates

Topic: Public sector, Activity analysis, value added Company: London Borough

Evaluation of cost drivers Decision about comparing department performance with all similar departments nationally Accuracy of cost and potential areas for cost reduction

Total cost related to staff in department is 200,000 Total number of hours for all staff of the department is 8000

No. 1

Activity Requests for information from businesses

Request for information from developers

Project management and development.

Brief description Information packs have been prepared for telephone enquiries or letters to standardise the response to requests for information. Additional research may be necessary but this is not a significant activity. Information packs are provided giving details of labour market, training, financial information and further contacts. The department develops and manages a wide range of projects including environmental improvements, seminars, training projects and joint venture developments. There is a lot of time taken up by preparing reports for committees.

No. Activity 4 Policy development

Brief description A policy contribution includes work for different bodies such as the Government departments.

Work for other council departments. It is difficult to define a typical request for information but generally each request involves a similar amount of activity. Other This is time spent on various activities in the department, which Clara will consider in more detail in the future.

Activity

Cost driver

Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other

Number of requests for information from businesses Number of requests for information from developers Number of requests for Committee reports. Number of requests for policy input. Number of requests for information or analysis. Number of hours. Total

Estimated percentage of departments total hours by activity % 21

14

30 14 6 15 100%

Cost driver - estimated annual

Estimated annual volume - minimum 1,000

Estimated annual volume - maximum 1,200

Number of requests for information from businesses Number of requests for information from developers Number of requests for Committee reports. Number of requests for policy input. Number of requests for information or analysis. Number of hours.

550

650

70 140 170

120 180 240

1,200

1,200

Evaluate the choice of cost drivers identified by Clara and discuss how the accuracy of the costs can be improved.

No. 1

Cost Drivers Number of requests for information from businesses.

Number of request for information from developers.

Number of requests for committee reports.

Brief description Information packs have been prepared for telephone enquiries or letters to standardise the response to requests for information. Additional research may be necessary but this is not a significant activity. Information packs are provided giving details of labour market, training, financial information and further contacts. The department develops and manages a wide range of projects including environmental improvements, seminars, training projects and joint venture developments. There is a lot of time taken up by preparing reports for committees.

No. Cost drivers 4 Number of requests for policy input

Brief description A policy contribution includes work for different bodies such as the Government departments.

Number of requests for information or analysis

It is difficult to define a typical request for information but generally each request involves a similar amount of activity. This is time spent on various activities in the department, which Clara will consider in more detail in the future.

Number of hours

Cost drivers by the department Number of requests for information from businesses. Number of request for information from developers.

Suggested Cost drivers Number of requests entertained to provide information to businesses Number of requests entertained to provide information to developers

Number of requests for committee reports. Number of hours used to prepare reports Number of requests for policy input Number of requests for information or analysis Number of hours used for policy input Number of hours spent on providing information or analysis

Clara has taken the total cost of the department that is 200,000 and the total number of employees hours 8,000. The above condition implies that the per hour rate of every activity is same that is 25. This may not be the case and every activity cost has to be analyzed individually to improve the accuracy of the costs.

Clara is hoping to use the information to compare the performance of her department with similar departments nationally and also identify potential areas for cost reduction. Discuss.

Activity Requests for information from businesses

Costs 42,000

Request for information from developers

28,000

Project management and development.

60,000

Policy development Work for other council departments.

28,000 12,000

Other Total

30,000 200,000

Activity

Estimated rate Estimated rate at Estimated rate at at max volume min volume average volume 35 42 38.5

Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other

43.076

50.909

46.99

500

857.14

678.57

155.55 70.58

200 50

177.77 60.29

N.A

N.A

N.A

Activity

Estimated rate at max volume 40 39 500 150 52 N.A

Estimated rate at min volume 36 47.20 857.14 205 65.58 N.A

Estimated rate at average volume 39 45 678.57 180 58.79 N.A

Requests for information from businesses Request for information from developers Project management and development. Policy development Work for other council departments. Other

The activity with the title other has to be properly analyzed to help reduce the cost. There are no categorization of work being done under this activity. This activity can neither be classified as value added nor non-value added activity. Proper analysis of this activity can help the organization reduce up to 15% of cost associated with the activity.