abc (activity based costing)

Group Members:

Ibrar Hussain 13007058057

Zeeshan Shoukat 13007058040

Muhammad Faisal 13007058056

Present to our respected teacher

“Miss Farrah Yasir”

What is ABC • Activity-based costing (ABC) is

a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

Cont….

• It allocates direct and indirect costs to products and services based on the level of activities used to create and deliver those products and services.

• Activities such as:

purchasing, design, production, sales, marketing and customer service are utilized by different products and services (cost objects) based on their complexity and business requirements.

Direct & indirect material?

• Direct costs: A cost that can be directly traced to producing specific goods or services., e.g., salaries for project staff and materials required for a particular project.

• Indirect costs: are costs that are not directly accountable to a cost object (such as a particular function or product). Indirect costs may be either fixed or variable. Indirect costs include taxes, administration, personnel and security costs, and are also known as overhead.

Next presenter

Zeeshan shoukat

Activity-Based Costing System 9

Process Product

(A,B,C,D,…,N)

Cost Pools (I,II,III,IV,V….,N)

Cost Drivers(1,2,3,4,…N)

Activities (1,2,3,4,…N)

Product (A,B,C,D,…,N)

Cost Pools (I,II,III,IV,V….,N)

Cost Drivers(1,2,3,4,…N)

Allocation Stage


No. ofSetupHours

Product A Product B Product C

CostAllocation

Base

CostObjects

No. ofShipments

No. of employees

SetupDesign ShippingActivityOverheads Cost

Pool

D e p a r t m e n t s


Cost Pools & Cost Drivers

Activity Cost Pools Activity Cost Drivers

Productiona) Number of unitsb) Number of set-upsc) Number electricity units consumed

Marketinga) Number of sales personnelb) Number of sales orders

Research & Developmenta) Number of research projectsb) Personnel hours spend on projectsc) Technical complexities of the projects

Customer Servicea) Number of service callsb) Number of products servicedc) Hours spend on servicing products

Purchasing a) Number of purchase orders

Material Handling a) Number of material requisitions

Question:-

• Unit 5000• Direct labor hours: 21 hours• Raw material cost: 20,000• Hours in design department 5 hours• Production runs 1 runs• Machine hours 12 hours

Activity cost pool Overhead cost Cost driver Budget level for cost driver

Purchasing, storage and material handling

Rs. 400,000 Raw material costs 2,000,000

Engineering and product design 200,000 Hours in design department 10,000 hours

Machine setup costs 140,000 Production runs 2,000 runs

Machine depereciation and maintenance

600,000 Machine hours 200,000 hours

Factory depreciation, taxes, insurance and utilitis


Other manufacturing overhead costs


2040,000

Solution:a) Pool rates:-

Rs. 0.2 per R/M cost (Rs.400000/2000000)

Rs. 20 per design dep. Hrs. (Rs. 200000/10,000 hrs)

Rs. 70 per Prod. Runs (Rs. 140000/2000 runs)

Rs. 3 per machine Hrs (Rs. 600000/200000)

Rs. 2 per machine Hrs (Rs. 400000/200000)

Rs. 1.5 per machine Hrs (Rs. 300000/200000)

b) Overhead cost:-

Rs. 0.2*Rs. 20,000=Rs. 4000

Rs. 20*5 hrs. =Rs. 100

Rs. 70*1 run =Rs. 70

Rs. 3* 12 hrs. =Rs. 36

Rs. 2* 12 hrs. =Rs. 24

Rs. 1.5* 12 hrs. =Rs.18

Total FOH Rs. 4248

c)Overhead cost per Box = Rs. 0.8496 per box

d) POHRRs. 255 per D/L hrs

e) FOH = Rs. 255*21 D/L hrs =Rs.5355

f) Rs. 5355/5000= Rs. 1.071 per box

next presenter

Faisal Awan

Advantages

More accurate product costing through:

• More accurate information leads to better decision• Enhanced control over overhead costs• Better management decisions• Managers are more likely to focus on improving Efficiency in the

most costly activities to reducing of cost .

Dis- Advantages

• ABC Costly to implement• Companies are very large by the activities maintain ABC system

very difficult• Require time to employee to check the activities daily

abc (activity based costing)

Education