NIBHA KUMARI MBA 1 YR

INTRODUCTION
COST is composed ofDIRECT MATERIAL,LABOUR AND OVERHEAD. Overheads are also called as INDIRECT COSTS.ABC costing is mainly based on overhead costing. These costs are first identified,classified,allocated,apportioned wherever allocation is not possible, reapportioned and finally absorbed in the products/services.ABC is modern approach of indirect cost allocation.ABC not only allocate the indirect cost to department but it recognizes individual activity as the lowest unit for indirect cost allocation.

Composition of Cost
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0 1 Direct Material 2 3 Labour Overheads 4

Activity-Based Costing (ABC)

An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.

ABC Definitions
Activity based costing is an approach for

allocating overhead costs. An activity is an event that incurs costs. A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed.

Activity Based Costing

ABC views product costs as results of activities. Each product/service/process in the firm is thought in terms of the bundle of activities required to produce/provide/run the product/service/process. For instance, making a batch of spares requires material & labor (costs that vary with batch size), accepting the order and scheduling it, ordering the materials, setting up machines (all costs that do not vary with batch size), a sales catalog (costs that depend on the firms lines of business) etc ..
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Conventional Costing
Total Cost = Material + Labor+ Overheads
Overheads are allocated to the products on volume based measures e.g. labor hours, machine hours, units produced

the costing Will this not distort in the new environment?

ABC provides an Alternative.

Conventional Costing

AB Costing Resources

Economic Element

Expenses

Activities
Cost Objects

Work Performed

Cost Objects

Product or service

Building an ABC Model

Identify Resources Identify Activities Identify Cost Objects

Define Activity Drivers

Define Resource Drivers

Enter Resource Costs

Enter Resource Driver Qty.

Enter Activity Driver Qty.

Calculate Costs

Activities: Types
Unit level: Performed each time a unit is produced Batch level: Performed each time a batch is product Product level: performed to support production different type of product Customer Level: Performed to support servicing customers Facility level: Residuary head

ABC: Where to Use?

High Overheads
Product Diversity or Multiple Products Customer Diversity Service Diversity Stiff Competition

Implementing ABC
and analyzing manufacturing process. Study of the activities involved. Activity cost pool. Cost drivers. Identification of costs with the products. Conclusion.

Understanding

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Limitations of abc
ABC is a complex system and requires lot of records

and tedious calculations. For small organizations, traditional cost accounting system may be more beneficial than ABC due to the simplicity of operation of the former. There is a need of trained professionals who are limited in number. Substantial investment of time and money is required for the implementation of this system.

When Should a Company Use ABC?

ABC is often considered as an option when one or more of the following conditions exist: Indirect costs are significant in proportion to direct costs and use only one or two cost-drivers. Goods are complex, requiring many inputs and processes. Simple, high-volume products perform more poorly than complex, low-volume products. Different departments believe costs are assigned inaccurately. The company loses bids it thought were low, and wins bids it thought were high. Operations have changed significantly, but the costing system has not changed.
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Overview of ABC
Identifies activities required to produce the

product or service Determines the cost of the activities Allocates costs to the cost object based on the objects consumption of activities

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