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Activity based costing (ABC) allocates overhead costs to products based on the activities consumed by each product. It identifies the activities involved in production and assigns overhead costs to products based on their use of each activity. This provides a more accurate picture of product costs than traditional costing. Value chain analysis examines the activities and processes involved in a firm's production and identifies opportunities to reduce costs. Target costing determines the maximum cost that can be incurred and still earn the desired profit margin. Life cycle costing considers all costs over the lifetime of an asset, including acquisition, operating, maintenance, and disposal costs.
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Activity Based Costing(ABC)/Value Chain Analysis/ Target Costing/ Life Cycle Costing
Activity based costing (ABC) allocates overhead costs to products based on the activities consumed by each product. It identifies the activities involved in production and assigns overhead costs to products based on their use of each activity. This provides a more accurate picture of product costs than traditional costing. Value chain analysis examines the activities and processes involved in a firm's production and identifies opportunities to reduce costs. Target costing determines the maximum cost that can be incurred and still earn the desired profit margin. Life cycle costing considers all costs over the lifetime of an asset, including acquisition, operating, maintenance, and disposal costs.
Activity based costing (ABC) allocates overhead costs to products based on the activities consumed by each product. It identifies the activities involved in production and assigns overhead costs to products based on their use of each activity. This provides a more accurate picture of product costs than traditional costing. Value chain analysis examines the activities and processes involved in a firm's production and identifies opportunities to reduce costs. Target costing determines the maximum cost that can be incurred and still earn the desired profit margin. Life cycle costing considers all costs over the lifetime of an asset, including acquisition, operating, maintenance, and disposal costs.
TARGET COSTING LIFE CYCLE COSTING Activity based costing(ABC) is a technique of apportionment of overhead incurred for production produce to the cost centre using suitable basis. This system allocates the overhead cost at a uniform rate on the basis of labor hour or machine hour worked. It doesn’t consider those activities which are involved in the production process. It focuses on analysis, recording, controlling and reporting on the cost and wider performance of activities rather than the traditional system. ABC is defined as “Cost attribution to cost units on the basis of benefits received from indirect activities e.g. Ordering, setting-up, assuring quality. -------------- CIMA • Thus ABC can be defined as a method of charging overhead to cost centers or cost units on the basis of benefits received from the particular indirect activity .Under ABC, overhead are attributed to products on an activity base. It also attempts to show relationship between overhead costs and the activity that cause the costs. OBJECTIVES OF ACTIVITY BASED COSTING 1. To identify value added activities in transactions. 2. To focus high cost activities. 3. To distribute overheads on the basis of activities. 4. To identify the opportunities for improvements and reduction of costs. 5. To validate the success of the quality drive with ABC. 6. To ensure accurate product costing for decision making. 7. To use information to improve product mix and pricing decisions. LEVELS OF ABC 1. Unit level activity
2. Batch level activity
3. Product level activity
4. Facility level activity
STEPS IN ABC SYSTEM The major steps in ABC system are; 1. STEP 1------ Process specification 2. STEP 2------ Identify main activities 3. STEP 3------ Identify non value adding activity 4. STEP 4------ Identification of activity cost pools. 5. STEP 5------ Selection of activity cost drivers 6. STEP 6------ Tracing of cost with cost objects 7. STEP 7------ Staff training 8. STEP 8------ Review and follow up ADVANTAGES OF ABC SYSTEM 1.It is more flexible and can be change immediately if needed. 2.It shows the cause and effects of relationship between cost and activity which is useful in controlling the cost. 3.By adopting ABC, it is possible to asvertain most accurately and realistic product cost. 4.It helps in fixing of competitive selling price. 5.Information regarding capacity utilisation is available for decision making. LIMITATION OF ABC SYSTEM 1. It is a complex system which consists of various cost pools and cost driver rates 2. It is difficult to attribute cost to single activities, some cost support several activities. 3. ABC requires total commitment and support from top level management. 4. Implementation of ABC requires bulk amount of time and money. 5. ABC requires positive attitudes and employees support for successful implementation. VALUE CHAIN ANALYSIS(VCA) • Value chain analysis is a strategic managerial tools to assess and review the various business functions in which utility is added to the products or services. The various business functions include research and development, product design, services or process, production, Marketing, distribution, customer service and strategy and administration. • The chain of activities that is performed to add value to inputs in order to arrive at the final outputs is referred to as value Chain. The value chain is a tool developed by DR. MICHEAL PORTER. The value chain is concentrating on the activities starting with raw materials till the conversion into final goods. PORTER classified value chain into two activities. They are : 1) Primary Activities a. Inbound logistics b. Operations c. Outbound logistics d. Marketing & sales e. Services 2) Secondary activities a) Infrastructure b) Human resource management c) Technology development d) Procurement ADVANTAGES OF VALUE CHAIN ANALYSIS
1. Helps to stay out of the “No profit zone”
2. Presents opportunities for integration 3. Aligns spending with value process 4. Helps to examine the activities of a firm’s and how they interact with one another and affect each other’s cost and performance. LIMITATION OF VALUE CHAIN ANALYSIS 1. Finding the costs, revenues and assets for each value chain activity gives rise to serious difficulties. 2. Value chain analysis is very difficult to understand by all the employees and hence may face resistance from employees as well as managers. 3. For a long term strategic decision making in cost structure, market price and capital investment may not be available because data of company provided is of a single period financial information. TARGET COSTING • Target costing is the cost that can be incurred while still earning the desired profit. Target cost = Selling price – desired profit “The Target costing is a disciplined process for determining and achieving a full stream cost at which a proposed product with specified functionality, performance and quality must be produced in order to generate the desired profitability at the products anticipated selling price over a specified period of time in the future.” • METHODS IN ESTABLISHMENT OF TARGET COSTS 1. Subtraction methods 2. Addition methods 3. Integrated methods • ADVANTAGES OF TARGET COSTING 1. Proactive approach to the management 2. Break down barriers between departments 3. Minimize non value added activities 4. Reduced time to market 5. Foster partnerships with suppliers • DISADVANTAGES OF TARGET COSTING 1. Target costing requires many meeting for coordination. 2. It’s implementation requires willingness to cooperate 3. May reduce the quality of products due to use cheap components which may be inferior quality 4. Effective implementation and use requires detailed data. LIFE CYCLE COSTING • Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition, support cost and other cost directly attributable for owing the assets. • In other words the process of identifying and documenting all the costs involved over the life of an assets is known as life cycle costing. • The cost under life cycle cost are: 1. Acquisition cost 2. Operating cost •Cost of failures •Cost of repairs •Cost of spares •Loss of production 3. Maintenance costs *Cost of corrective maintenance *Cost of preventive maintenance *Cost of predictive maintenance 4. Disposal costs IMPORTANCE OF LIFE CYCLE COSTING 1. Helps to make decisions for capital and investment based on least life cycle costs. 2. Rank each of the projects based on total costs of ownership 3. Makes more informed decisions. 4. Allow better reporting to key stakeholders. 5. Higher level of yields from the project. LIFE CYCLE OF AN ASSETS 1. Plan 2. Acquire 3. Operate 4. Maintain 5. Renew 6. Dispose • ADVANTAGES OF LIFE CYCLE COSTING 1. Improved forecasting 2. Improved awareness 3. Performance trade off against cost • DISADVANTAGES OF LIFE CYCLE COSTING 1. Time consuming 2. Costly 3. Technology