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8/8/2019 13813 Activity Based Costing
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Activity Based Costing
Presentation by
Prof. Asish K Bhattacharyya
Indian Institute of Management
Calcutta
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OBJECTIVES
OFABC
To improve accuracy of product cost To improve cost management
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FOCUS
OFABC
ABC focuses on support services,
particularly which are influenced by the
diversity and complexity of output rather
than simply by the volume of output.
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TRANSACTIO
N TYPES
Logistical transactions: concerned with
organizing the flow of resources
Balancing transactions: concerned with
matching supply of resources with demand
Quality transactions: concerned with the
validation that outputs match specifications
Change transactions: concerned with
providing ability to cope with changes
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ABC PRO
CESSFundamental Assignment to
Cost objects other cost objects
activities Costs of
activities
Cost objects:
Products
Service
Customers
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HIERARCHYOF
RESOURCES
Unit-level resources
Batch-level resources Product-level resources
Customer-level resources
Facility-level resources
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UNIT LEVEL RESO
URCES
Resources that are acquired specifically forindividual units of products or services.
Examples: Materials, parts, components,
labour, and energy.
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BATCH
LEVEL RESO
URCESResources acquired as a result of decision to
make a group or batch of similar products.
Examples: Materials, specialized labour,
and equipment
Direct to batches
Indirect to individual units of output
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PRODUCT-LEVEL
RESOURCES
Acquired as a result of the decision to
produce and sell a specific product or
service.
Examples: Specialized equipment, software,
and personnel.
Direct specific product or services
Indirect to batches or individual units
produced
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CUSTOMER-LEVEL
RESOURCESResources acquired as a result of decisions
to serve specific customers.
Examples: Specialized equipment, software,
and personnel
Direct to specific customers
Indirect to product-, batch-, or unit-level
decisions.
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FACILITY-LEVEL
RESOURCESResources are acquired as a result of decisions to
provide a general capacity to produce product or
services. Examples: Business support services, land,
buildings, management.
Direct to decisions about scale,scope, location, and
technology
Indirect to customers, products, batches, and
levels of output
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CO
STD
RIVER
A factor that causally affects costs over
a given time span
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TYPESOF
CO
STD
RIVERSCost Drivers
Structural Executional
cost drivers cost drivers
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HIERARCHY OF ACTIVITIES
Productsustaining
Customer
sustaining
Batch
Unit
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UNIT LEVEL ACTIVITIES Represent work performed for every unit of
product or service produced
The quantity of resources used is proportion
to volume
Cost drivers include labour hours, machine
hours, and materials quantity processed
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BATCH
LEVEL ACTIVITIES Include setting up a machine,purchasing
materials, and processing a customer order
Resources required are independent of
number of units in the batch
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PRODUCTION/CUSTOMER
SUSTAINING ACTIVITIES
Activities to ensure production of an
individual product or to service an
individual customer.
Resources required are independent of the
volume and the mix of products or servicessold to a customer.
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IDENTIFICATIONOF
ACTIVITIES
Top-down approach
Interview or participative approach
Recycling approach
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TO
P-DOW
N APPRO
ACH
Activity list is developed based on the
teams understanding of the organizations
process.
It is quick and inexpensive.
The team should have thorough
understanding and experience of thebusiness process..
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INTERVIEWOR
PARTICIPATIVE APPROACH
Analysis team interviews employees
Team of employees identify the activitiesthat they perform
Higher level of accuracy as compared to
top-down approach Dangers: Lack of truthful disclosures; False
recall
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RECYCLING APPRO
ACH
It may be possible to reuse documentation ofprocesses developed for other purposes.
For example documents developed for ISO
9000 certification may be used
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SELECTING COST DRIVER
BASES
An activity driver is a quantitative measure
of the output of a activity.
A cost driver base is a measurable cause or
driver of performing an activity.
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TYPES OF ACTIVITY
DRIVERS
Transaction drivers
Duration drivers
Intensity drivers
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TRANSACTIO
ND
RIVERS Examples: Number of setups; Number of
receipts; Number of products supported.
Assumes that all outputs makes
essentially the same demands on the
activity
Least expensive
Could give inaccurate results
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DURATI
OND
RIVERS Represent the amount of time required to
perform an activity.
Should be used when significant variation
exists in the amount of activity required for
different outputs.
Examples: Setup hours; Inspection hours;Labour hours
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INTENSITYD
RIVERS Intensity drivers directly charge for the
resources used each time an activity is
performed.
Most accurate, but most expensive.
Should be used only when the resources
associated with performing an activity areboth expensive and variable each time an
activity is performed.
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CHOOSING THE BEST
COST-DRIVER BASE
An appropriate cost driver base should:
Logically have a cause and effectrelationship with the activity and the use of
resources
Be feasible to measure
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CHOOSING THE BEST
COST-DRIVER BASE
Predict or explain activities use ofresources with reasonable accuracy
Be based on practical capacity of the
resource to support activities
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MEASURING RESOURCE
COST TO ACTIVITIES
Employee Activity Data sheet
Department
Name,title,and salary/Hourly rate
Activity number and activity description
Hour booking against
departments/products/services
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HIGHER LEVEL
RESOURCESIf higher level resources are both necessary
and used for lower level activities
For decisions involving major products or
processes when resource spending and
activities are greatly mismatched, averaging
higher level activity costs can lead tomisinformation
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H
IGH
ER LEVEL RESO
URCES
Extreme product complexity and diversity
may justify averaging resource costs acrossactivity levels in order to ease the
managers decision making burden.
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CONDENSING THE
ACTIVITY LIST
Complete activity list provide informationfor process improvement.
For product costing purposes it is more
convenient to to condense the activity list
according to common cost driver bases.
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BENEF
ITSOF
ABC
Provides information to measure
Product profitability
Customer profitability
Cost of new products or services
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ACTIVITY BASED
MANAGEMENTActivities
Value added Non-value added
Enhances the Do not add to
value of the customer-perceived
product in the value
eyes of customers
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THANKS