ASSIGNMENT

SUBMITTED BY:
Akanksha Jain
05817003909
MBA-I

SUBMITTED TO:
Mrs. Neeru Garg

QUANTITATIVE METHODS
Write short notes with example on:
INDEPENDENT EVENT:
Two or more events are said to be independent when the outcome
of one does not affect the other and is not affected by the other
event. Two events are independent means that the occurrence of
one event makes it neither more nor less probable that the other
occurs.
If there are two events A and B. The outcome of event A, has no
effect on the outcome of event B. Such as "It rained on Tuesday"
and "My chair broke at work". When calculating the probabilities
for independent events the probabilities are multiplied.
The event of getting a 6 the first time a die is rolled and the event
of getting a 6 the second time are independent.
EXAMPLE: What is the probability of throwing a double three
with two dice?

SOLUTION:

It is the result of throwing three with the first die and three with the
second die.

Probability of 3 on Ist Dice:

P1=1/6

Probability of 3 on 2nd Dice:

P2=1/6

The total possibilities are, one from six outcomes for the first event
and one from six outcomes for the second, P1.P2

Therefore 1/6.1/6= 1/36

DEPENDENT EVENT:
In some cases one event is dependent on another; that is, two or
more events are said to be dependent if the occurrence or nonoc-
currence of one of the events affects the probabilities of occurrence
of any of the others.
Consider that two or more events are dependent. If p1 is the
probability of a first event; p2 the probability that after the first
happens, the second will occur; p3 the probability that after the first
and second have happened, the third will occur; etc., then the
probability that all events will happen in the given order is the
product p1 - p2 - p3 .
EXAMPLE: Slips numbered 1 through 9 are placed in a box.
If 2 slips are drawn, without replacement, what is the
probability that

1. both are odd?

2. both are even?

SOLUTION:

1. The probability that the first is odd is

P1=5/9

and the probability that the second is odd is

P2=4/8

Therefore, the probability that both are odd is

P=P1.P2

=5/9.4/8

=5/18
2. The probability that the first is even is

P1=4/9

and the probability that the second is even is

P2=3/8

Therefore, the probability that both are even is

P=P1.P2

=4/9.3/8

=1/6

MUTUALLY EXCLUSIVE
Two events are mutually exclusive if they cannot occur at the
same time. Two or more events are said to be mutually exclusive
or incompatible when only one of those events can occur at a time.
No two of these events occur simultaneously i.e. the occurrence of
one prevents the occurrence of the others. The "Mutually
Exclusivity" property gives an idea of the inter relationships
between the events i.e. whether they are connected or not. Events
which are mutually exclusive are not connected. If there are two
events A and B. If event A happens, then event B cannot, or vice-
versa. The two events "it rained on Tuesday" and "it did not rain on
Tuesday" are mutually exclusive events. When calculating the
probabilities for exclusive events add the probabilities.
EXAMPLE: What is the probability of drawing either a king, a
queen, or a jack from a deck of playing cards?

SOLUTION: The individual probabilities are

King=4/52

Queen=4/52
Jack=4/52

Therefore, the probability of success is

P=4/52+4/52+4/52

=12/52

=3/13

NOT-MUTUALLY EXCLUSIVE

Two or more events are said to be "Not Mutually Exclusive" or

"Compatible" if they are not "Mutually Exclusive". Two or more
of these events can occur simultaneously. i.e. the occurrence of one
does not prevent the occurrence of the others in all cases. The
"Mutually Exclusivity" property gives an idea of the inter
relationships between the events i.e. whether they are connected or
not. If there are two events A and B. If A happens, there will be
probability of happening of B.

EXAMPLE: What is the probability of drawing either a king or a

heart from a standard pack of cards?

P(KING)=4/52

P(HEART)=13/52

P(KING AND HEART)=4/52.13/52

=1/52

P(KING OR HEART)=P(KING)+P(HEART)- P(KING AND

HEART)

=4/52+13/52-1/52

=4/13
 ASSIGNMENT
ON
ACTIVITY BASED
COSTING
SUBMITTED BY:
Akanksha Jain
05817003909
MBA-I

SUBMITTED TO:
Mrs. Neeru Garg

ACCOUNTING FOR MANAGERS

What is activity based costing and what are its benefits?
Give an example.
Activity based costing(ABC) is an alternative to traditional way of
accounting. Traditionally cost accountants had arbitrarily added a
broad percentage of expenses into the direct costs to allow for the
indirect costs.

However as the percentages of indirect or overhead costs had risen,

this technique became increasingly inaccurate because the indirect
costs were not caused equally by all the products. For example,
one product might take more time in one expensive machine than
another product, but since the amount of direct labor and materials
might be the same, the additional cost for the use of the machine
would not be recognised when the same broad 'on-cost' percentage
is added to all products. Consequently, when multiple products
share common costs, there is a danger of one product subsidizing
another.

Activity-based costing 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.

In this way an organization can precisely estimate the cost of its

individual products and services for the purposes of identifying
and eliminating those which are unprofitable and lowering the
prices of those which are overpriced.

ABC seeks to identify cause and effect relationships to objectively

assign costs. Once costs of the activities have been identified, the
cost of each activity is attributed to each product to the extent that
the product uses the activity. In this way ABC often identifies
areas of high overhead costs per unit and so directs attention to
finding ways to reduce the costs or to charge more for costly
products.
In a business organization, the ABC methodology assigns an
organization's resource costs through activities to the products and
services provided to its customers. It is generally used as a tool for
understanding product and customer cost and profitability. As
such, ABC has predominantly been used to support strategic
decisions such as pricing, outsourcing and identification and
measurement of process improvement initiatives.

Activity-based costing has become popular in business writing and

management circles. (An example of an activity would be process
customer complaints.) However, calculating baselines for
activities, developing the model, and retesting the model once it is
implemented is time-consuming and costly. Kaplan and Anderson
developed improvements in the process through what they call
time-driven ABC. Time-driven ABC decreases the amount of data
needed, and only requires estimates of two things: (1) the practical
capacity of committed resources and their cost, and (2) unit times
for performing transactional activities. Key concepts include:

Building an accurate time-based algorithm in one facility will

typically serve as a template that can be easily applied and
customized to other plants, or even other companies in an industry.

Time-driven ABC requires less time and resources to implement.

At one company cited, it took two people two days per month to
load, calculate, validate, and report findings, compared to the ten-
person team spending over three weeks to maintain the previous
(traditional ABC) model.

ABC work as follows:

• Identification of “cost pools” or activities which a

product/service must pass.
• Estimation of total cost of each activity must be estimated for
time period.
 • Estimation of number of hours spent on each activity for
same time period.
• Determination and assigning of “cost driver” (i.e. quantity, #
of labor hours, # of machine hours, # of parts).

BENEFITS

• It helps to identify inefficient product, department and

activity.
• It helps to allocate more resources on profitable product,
department and activity.
• It helps to control the cost at individual level and on
departmental level.
• It helps to find unnecessary costs.
• It helps to identify most profitable product, customer and
channels.
• It helps to identify least profitable product, customer and
channels.
• It help to identify root causes of poor financial performance.
• It helps to equip the manager with cost intelligence to
stimulate improvements.
• It facilitate the better marketing mix and better positioning of
products.
• It enhance the bargaining power with customers.
• It also help in effective decision making by managers.
• It also facilitate savings and cost reduction.

The costing is now based on the activities, the cost of serving a

customer can be ascertained individually. Deducting the cost of
product and cost to serve each customer, one can arrive at
customer’s profitability. This method of dealing with customer
costs and product costs, enables the identification of the idntifying
the probabilty of each customer and positioning the product and
services accordingly.
Continuous improvement

It help in continuous improvement by identifying the various cost

involved and analyze that cost. By analyzing one become avle to
identify whether cost add value or not. So, this is a continous
process which focusses on improvement. Its main objective is to
achieve full efficiency.

It also help in effective decision making by managers.

It also facilitate savings and cost reduction.

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.

EXAMPLE:
Major ltd. Manufactures two product A and B. The product A is
low volume item and its sales are only 5000 units per annum. The
product B is a high volume item and its sales are 20000 units per
annum. Both requires two direct labour hours.
The company works 50000 direct labour hours each year as given
below:
PRODUCT A: 10000 HOURS
PRODUCT B: 40000 HOURS
Direct material for:
PRODUCT A=RS.25
PRODUCT B=RS.15
Direct labour at rs 5 per hour:
PRODUCT A=10
PRODUCT B=10
The company’s total manufacturing overhead costs are rs. 875000
per annum
The company has analysed its operations and has determined the
five activities as cost drivers in the incurrence of overhead costs.
No. of events or transaction
ACTIVITY TRACEABLE TOTAL PRODUCT PRODUCT
COSTS A B
Machine 230000 5000 3000 2000
set ups
Quality 160000 8000 5000 3000
inspections
Production 81000 600 200 400
orders
Machine 314000 40000 12000 28000
hours
worked
Material 90000 750 150 600
receipts
total 875000

Compute per unit cost by using activity based costing?

SOLUTION:
 Over head rate by activity

ACTIVITY TRACEABLE TOTAL RATE PER

COST EVENTS EVENT(RS.)
Machine set 230000 5000 46 per setup
ups
Quality 160000 8000 20 per
inspections inspection
Production 81000 600 135 per order
orders
Machine 314000 40000 7.85 per hour
hours
worked
Material 90000 750 120 per
receipts receipt

Overhead cost per unit or product

Product Product A Product Product B

A B
PARTICULARS EVENTS AMOUNT(RS) EVENTS AMOUNT(RS)
Machine set ups 3000 138000 2000 92000
Quality 5000 100000 3000 60000
inspections
Production 200 27000 400 54000
orders
Machine hours 12000 94200 28000 219800
worked
Material receipts 150 18000 600 72000
total 377200 497800
No. of units 5000 20000
produced
Overhead cost Rs.75.44 Rs.24.89
per unit