PGDM 2014-2016

Program & Batch:

Term 2

Term:

MEPP

Course Name:

S.R. Dash

Name of the faculty:

Management Accounting

Topic/ Title :

ORIGINAL

Original
or Revised Write-up:

Group Number:
Contact No. and email of Group
Coordinator:
Group Members:

9717711008, deepti.tripathi16@gmail.com
Sl.
1
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Roll No.
1401-01049
1401-01017
1401-03146
1401-02067
1401-03048
1401-03108

Name
Deepti Tripathi
Amruth Pavan Davuluri
Saptadip Saha
Kumar Aniket
Chandan Kumar Jha
Neha Kasana

Research Paper Report on Activity Based

Costing

Basics of Activity Based Costing

Cost of the product is summation of the costs of all the
activities required to manufacture and deliver the product.
Product do not consume all the costs directly
There are other costs such as manufacturing overheads
which are not direct material and direct labor costs. These
are activities performed and money is spent into executing
it. So all activities are consumed by product/services.
ABC first assigns cost to the activities that incur overheads
to the company. It then allocates cost to those activities that
requires expenditures on it.

Steps Involved in ABC

1. Identify Resources: It represents the expenditure of a
company. Examples include production sales force, sales
and marketing teams or other machines or resources used
the projects.
2. Identify Activities: It represent the work performed in a
company. Examples financial and managerial summaries
, sales activities, services provided to end users, back end
jobs undertaken etc .
3. Identify Cost Objects: Cost objects are prime to the
operations of ABC as the cost objects are used by ABC
to show profitability. Cost objects can be like services or
products which a consumer purchases. It is also used to

process or substantiate the need of a business unit or

other divisions or new plants or production house. It is
also used to identify potential customers or value losing
customers.
4. Determine Resource Drivers: It establishes the link
between the expenditures of an organization and the
activities performed.
-Example: salary of sales representatives depend upon
the amount of efforts and time put in by them while
performing these activities.
5. Determine Cost Drivers: It links the cost of performing
certain activities to cost objects. It goes in this manner
that the resources consumed gets identified on the basis
of the services or product delivered to the consumers.
6. Enter Resource Costs
7. Enter Resource Driver Quantity
8. Enter Activity Driver Quantity
9. Calculate Costs

Distinction between ABC and Traditional Costing

Traditional Costing
Expenditures

Activity Based Costing

Resources

Economic
Elements

Activities

Work
Performed

Cost Objects

Product/
Services

Cost Objects

ABC
It depend upon activites
consumed by the cost
object
Used when overhead
costs are high and there
are large number of
varied products
It is complex but
accurate
Calculated on the basis
of customers feedback
and pocket range.

Traditional
Used up resources and
cost objects usually
determines the cost
Used when overhead
costs are not too much
and competiton is not
too high in the market.
It is simple but is not able
to calculate the true cost

Calculated after product has

been manufactured.

Problem Evaluating Sales Representative

performance: Implication of Activity Based
Costing:
An Illustration:
Let XYZ be a firm which produces product on the specific
demands of the consumers.

 In ABC, the activities that cause a cost to be incurred or the

measures with which a cost varies are called cost drivers
ABC categorizes drivers by unit-, batch-, and product-level
activities.
Unit-level activities are ones which are executed on a single
product. Examples of unit-level manufacturing activities are
machining products, assembling products, and inspecting
products. Batch-level activities are performed on a group of
units and usually include activities such as machine set-up and
material handling. Product-level activities are tasks that relate to
a specific product in its entirety and can include design reengineering, product design testing, and parts administration.

PERFORMANCE EVALUATION VIA

TRADITIONAL COSTING METHOD
Term 1 (in US Term 2 (in US
$)
$)
Price

96000

96000

Direct Material

24000

24000

Direct Labour

9900

9900

Manufacturing
Overhead

21600

21600

Gross Margin

40500

40500

Sales Comission

4800

4800

Margin on orders

35700

35700

Assumptions :
a. In Terms 1 c customers order is to be produced in two
batches and requires two deliveries. Also customer goes
for 20 hours of training so that they can comprehend the
dynamics of using the product.
b. In Terms 2the customers order is to be produced in
eight batches, and requires eight deliveries. Also the
customer goes for 40 hours of training so that they can
understand the dynamics of using the product.
c. Direct labor, direct material and manufacturing overhead
costs for Terms 1 and 2 are as computed in Table 2.
d. Sales commissions = US$96,0000*.05 = US$4800.

PERFORMANCE EVALUATION VIA

ACTIVITY BASED COSTING METHOD
Price

96000 (In US $) 96000 (In US $)

Direct Material

24000

24000

Direct Labour

9900

9900

Power Usage

1320

1320

Inspection

1491

1491

Machine Setup

1500

6000

Machine Handling

1050

1050

Parts Administration

1000

1000

Product Engineering

1116

1116

Product Space

7029

7029

Gross Margin

47594

43094

Sales Commissions

4800

4800

Delivery Cost

700

2800

Customer Training costs

600

1200

Margin on Orders

41494

34294

Manufacturing Overhead

Assumptions:
a. In Terms 1 the customers order is to be produced
in two batches and subsequently requires two
deliveries. Also the customer is given 20 hours of
customer training to understand the dynamics of
using the product.
b. In Terms 2 the customers order is to be produced
in eight batches subsequently requires eight
deliveries. Also the customer is given 40 hours of
customer training to understand the dynamics of
using the product.
c. For Terms 1 and 2 the direct labor and
material cost are calculated in the above table .
Machine setup cost is the only manufacturing cost
that has altered by changing the batch quantity. Its
now computed as: machine setup 8
setups*US$750(per setup) = US$6000.00.
d. Commissions on sales= US$96,0000*.05 =
US$4800.
e. Delivery costs = 2 deliveries*US$350/delivery =
US$700, customer training cost = 20
hours*US$30/hours = US$600.

f. Delivery costs = 8 deliveries*US$350/delivery =

US$2800, customer training cost = 40 hours
US*$30/hours = US$1200.

Remarks
While using traditional method we can see that the
manufacturing costs and gross profits are equal for
both the batches. We can differentiate between the
batches.
While using ABC, the cost is higher when the
company produces in eight batch rather than when it
produces in a batch of two. So the gross profit is low
when the products are delivered in eight batch than in
batch of two.
In ABC an account of non manufacturing activities
can be evaluated which can help in decision making.

Evaluating a sales representatives efficiency

PERFORMANCE EVALUATION MEASURES

FOR SALES REPRESENTATIVES

Sales
Sales
representative A ( representative
In US $)
B (In US $)
Gross Profit

250000

250000

Commissions

25000

25000

Calling
Customers

29250

22750

Sales
Presentations

63000

52500

Report
Preparation

5000

8000

Sending
Informations

7000

4500

Representative
Profitability

120750

137250

Marketing Costs

Assumptions :
a. For both A and B, commissions on sales =
US$500,000*0.05 = US$25,000.
b. For A, expense on calling customers = 9000
calls*US$3.25 = US$29,250, presentations on sales=
30 presentations *US$2100 =US$63,000, preparation
of reports= 250* hoursUS$20 = US$5000,
information communication= 700*packetsUS$10 =
US$7000.
c. For B, expense on customer s call = 7000
calls*US$3.25 = US$22,250, presentations on sales =
25 presentations *US$2100 =US$52,500, preparation
of report= 400 hours*US$20 = US$8000, information
communications= 450 packets*US$10 = US$4500.

Conclusions :
Each sales representative had sales of
US$500,000 with a gross profit of
US$250,000.
The traditional methods of performance
evaluation gauges the output of both the
representatives as the same.

Using ABC costing method we can evaluate

the performance of two sales representatives
A and B.
Summary:
ABC offers a way to improve performance
and target profit growth in sectors where
competitions are more .
A check can be established upon sales
representatives
when
they
splurge
organizations resources.
Marketing management can include costs of
various activities necessary to meet any
order and cost incurred. Doing so will
increase the awareness and sensitivity of a
sales representative on his or her decision on
the firms cost.
References :
1. Sciencedirect.com
2. Accountingcoach.com
3. Wikipedia
4. Investopedia

Thank You