Welcome to the

Presentation

Group:4
NAME

ID

MD. SAIDUR RAHMAN SAID

12102053

Jannatul Ferdoushi

12102061

Kamrul Hasan Rana

12102069

Md.Abu Saddam

12102073

Md.Mushfikur Rahman

12102074

Activity-Based Costing

Better Costing for Better Decisions

ABC What is it?

ABC is the Activity Based Cost
accounting method.
ABC focuses on identifying all activities
associated with making a product or doing
a process.

Activity-Based Costing
Traditional allocation method
Costs

Products

Activity-based allocation method

Costs

Activities
First stage

Products
Second stage
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Under costing and Over costing Example

Far Abid Sir ordered amounts to
85
Suvo Sir consumed
110
Salam Sir order is
115
Ronik Sir consumed
90
Total
400
What is the average cost per lunch?

400 4 = 100

Far Abid and Ronik Sir

are over

costed.

Suvo and Salam Sir

are under

costed.

Basics of A B C
Cost of a product is the sum of the
costs of all activities required to
manufacture and deliver the product.
Products do not consume costs directly
Money is spent on activities
Activities are consumed by
product/services

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
The primary objective of ABC is to assign costs
that reflect/mirror the physical dynamics of the
business
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ABC systems addresses the

following Questions:
What activities are being performed by the
organisational resources?
How much does it cost to perform activities?
Why does the oranisation need to perform those
activities?
How much of each activity is required for the
organisations products, services, and
customers?

ABC Terms

Activity = work performed within an

organization.
Resource = financial input consumed by
activities.
Resource Driver = any measure of the
quantity of resources consumed by activities.
Activity Driver = any measure of the
frequency and intensity imposed by a cost
object.
Cost object = any customer, service, process
that a separate cost measurement is desired.

Building an ABC Model

Identify
Resources

Identify
Activities

Define
Resource
Drivers

Define
Activity
Drivers

Enter
Resource
Costs

Enter
Resource
Driver Qty.

Identify
Cost Objects

Enter
Activity
Driver Qty.

Calculate
Costs

ABC Cost Example

C ar
T ra n s m is s io n

C h a s s is

M o to r
P ro d u c tio n L in e

V e rify P a c k in g S lip

R e c e iv e r M a tc h in g

C o u n tin g
Labor

R e c e iv in g
U p d a tin g R e c e ip t
M a te ria l

Q C C hecks

C o m p u te r T im e

S to c k in g

A d m in is tra tiv e T im e

Composition of Cost
100

0
1
Direct Material

3
Labour

Overheads

Conventional Costing
Total Cost = Material + Labour+
Overheads
Overheads are allocated to the products on
volume based measures e.g. labour hours,
machine hours, units produced
Will this not distort the costing in the
new environment?

Conventional Costing

Expenses

AB Costing

Economic
Element

Resources

Activities

Work
Performed

Cost Objects

Cost Objects

Product or
service

Martin Ltd. Manufactures two products. Product A is a highVolume product while Product B is a low-volume product.
Details of production are shown as follows:
Product A Product B
Materials cost per unit
$130
$130
Direct Labour cost per hour $50
$50
Direct machine hour per unit 4 hrs
4 hrs
Direct labour hour per unit
2 hrs
2 hrs
Output
10
100
No. of purchase orders
3
4
No. of set up
40
80
Overhead costs are shown as follows:
$
Factory power
6600
Machinery set-up costs
4800
Materials handling and dispatch
2100
13500
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 Required
Calculate the product costs using:
(a) Absorption costing based on
machine hour
(b) Activity-based costing

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(a) Absorption costing based on

machine
hour
Product A Product B
$
$
Direct Materials
130
130
Direct labour
100
100
Overheads
($13500*4/440)
123
123
Product cost per unit
353
353
4*10+100*4

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(b) Activity based

Costing
Product A Product B
$

$
130
100

Direct Materials
Direct labour
Overheads
Factory power
(6600*4/440)
60
60
Machinery set-up cost
(4800*40/120*1/10)
160
(4800*80/120*1/10)
Materials handling & dispatch
(2100*3/7*1/10)
90
(2100*4/7*1/100)
Product cost per unit
540

130
100

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12
334
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Implementing ABC
Step 1 Plan the system
What are the goals?
Inventory valuation
Process improvement

Foster active involvement

Assemble cross-functional team
Functional specialists

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Implementing ABC
Step 2 Define, analyze activities and
resources
Decompose organization into elemental
activities
Who does what, and why?
Interview employees
Determine resources
Determine inputs and outputs

21

Implementing ABC
Gather statistics on activities
Inputs and outputs
Transaction, duration, intensity
For possible use as second-stage cost drivers

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Implementing ABC
Step 3 Establish activity cost pools
and determine first stage allocation
First stage allocations assign costs to
cost pools
Requires costs to be re-categorized
according to why they are incurred, not by
type
Drivers may be employee time, square
footage, etc.

23

Implementing ABC
Step 4 Determine second stage drivers
and assign costs to cost objects
Outputs of activity analysis may be second
stage drivers
Distance moved, times handled, machine hours,
units, etc.

Amount assigned to the cost object is the

amount of activity consumed times the rate
per unit of the activity
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Degrees of Implementation

Tier 1 Direct Costs

Tier 2 Incremental Costs
Tier 3 Full Costs

Tier 1 Direct Costs

Direct costs obviously associated with
product including managerial costs.
Ex: personnel payroll, supplies, rental
equipment.
Overhead and support costs not included.
Oriented for small projects or improving a
process vs focus on price of production or
where infrastructure is too large to determine
overhead and support costs accurately.

Tier 2 Incremental Costs

Tier 1 costs + support costs of
organization.
Incremental costs typically include over
95% of the organizational costs.
More difficult than Tier 1 due to
subjective distribution of expenses across
multiple elements.

Tier 3 Full Costs

Tier 3 includes all organizational,
managerial, direct, support and overhead
costs. This is the most comprehensive,
difficult.
Least used method.

When do we use ABC costing?

When one or more of the following conditions
are present:
Product lines differ in volume and
manufacturing complexity.
Product lines are numerous and diverse,
and they require different degrees of support
services.
Overhead costs constitute a significant
portion of total costs.

When do we use ABC costing?

The manufacturing process or number of
products has changed significantlyfor
example, from labor intensive to capital
intensive automation.
Production or marketing managers are
ignoring data provided by the existing
system and are instead using bootleg
costing data or other alternative data when
pricing or making other product decisions.

Additional Uses of ABC

Activity Based Management (ABM)
Extends the use of ABC from product costing
to a comprehensive management tool that
focuses on reducing costs and improving
processes and decision making.

Why activities management uses

Activities are actions

Improve product cost accuracy

Activities drive cost
Facilitates evaluation of alternatives
Encourages continuous improvement
Activities are easily understood by user
level
Improve decision support

Advantages of Activity-based
costing
More realistic cost assignment
Better decision-making
Better control over cost

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Limitation of Activity-based
costing
Difficult to apportion common costs
Difficult to implement
Inconsistent with the generally accepted
accounting principles (GAAP)
Activity-cost rates also need to be updated
regularly.
Very detailed ABC systems are costly to
operate and difficult to understand.
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Conclusion
ABC is an excellent tool for identifying
areas of concern in your company as well
as being useful to integrate into
management
It is however just a tool and must be setup and used properly in order to be
beneficial

THANK
YOU HAVE
FOR YOUR
ATTENTION
DO YOU
ANY KIND
QUESTION
?
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