Activity Based Costing
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Zero Based Budgeting (ZBB) & Activity Based Costing (ABC) simple as 123... Optimise-GB
Transcript of Activity Based Costing
Zero Based Budgeting (ZBB) & Activity Based
Costing(ABC) simple as 123...
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Benefits of using ABC and ZBB together
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• Budgeted costs are reduced by removing previously assumed expense
• It challenges managers to re-think their budgeted costs, rather than adding incremental spend from previous years
• It focuses managers on the business Input, Process and Output. This drives a better understanding of how the business works and what the true costs are for those activities
ZBB: Budgeting that works from the “ground up” and does not assume that costs from last year will exist this year. The budget therefore starts at £0.
Every activity / department is reviewed comprehensively and all expenditures must be approved before including them in the budget
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ABC :
Is used to identify the true cost of an activity including the costs for internal and external resources, space utilisation and power costs for the business premises
Is used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives
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Using ABC with ZBBOptimise-GB
ABC provokes thought to identify what needs to be in the budget by looking at:• Inputs (labour, machines, premises etc) • Process (manufacturing, administration, display units etc) to generate • Outputs (sale of goods or services)
ZBB starts the budget process with a blank page
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Where do you start?
• Segment your products / services into defined groups
• Prepare a sales forecast for each group
PC Sales January February March Q1
Revenue £30,000 £90,000 £120,000 £240,000
Volume 120 360 480 960
Price / Unit £250 £250 £250 £250
Example PC Store sales forecast
• Now you know your volumes, you are ableto calculate your costs
Cost elementsOptimise-GB
Fixed Costs
Variable Costs
£0
£10K
£20K
£30K
£40K
£50K
•Variable costs move in line with sales, for instance the cost of buying products will vary based on sales activity• Fixed costs remain constant irrespective of sales levels, for example the cost of rent for a shop will not change based on sales activity
What are the types of costs
that need to be considered?
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Variable costs
Variable costs will vary depending on the number of sales. For example:
• If you sell 20 PC’s, you need to buy 20 PC’s from your supplier
• If your store doubles its sales, you will need to recruit more shop assistants
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Calculating variable costs
PC Sales January February March Q1
Revenue £30,000 £90,000 £120,000 £240,000
Volume 120 360 480 960
Sales Price / Unit £250 £250 £250 £250
No. Staff 1 3 4
Staff costs £1,500 £3,000 £4,500 £9,500
PC costs £14,400 £43,200 £57,600 £115,200
• Each PC costs £120•1 sales assistant can sell 150 units per month• Each sales assistant will cost £1,500 per month
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Calculating variable costs - Administration costs
January February March Q1
Book keeping £500 £500 £500 £1,500
Marketing £1,000 £500 £0 £1,500
Stationery £250 £150 £100 £500
Admin costs £1,750 £1,150 £600 £3,500
Through ABC and ZBB you identify the required activities and assign costs
In other budgeting techniques you would roll the costs forward incrementally based on previous trends however this is not best practice
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Fixed costs
Fixed costs are not linear to sales volumes. For instance the monthly rent of £30,000 will not change if sales double from the previous month.
It may be argued that power is variable, but this is only true for manufacturing companies that utilise a substantial amount of power for their machines to function.
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Calculating Fixed costs
PC Sales January February March Q1
Power £1,000 £1,000 £1,000 £3,000
Rent £10,000 £10,000 £10,000 £30,000
• Power is £1,000 per month
• Rent is £10,000 per month
• You are now ready to pull together the budgets based on ZBB and ABC
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Forming the BudgetThrough ABC and ZBB
January February March Q1
Revenue £30,000 £90,000 £120,000 £240,000
Staff costs £1,500 £3,000 £4,500 £9,500
PC costs £14,400 £43,200 £57,600 £115,200
Admin costs £1,750 £1,150 £600 £3,500
Power £1,000 £1,000 £1,000 £3,000
Rent £10,000 £10,000 £10,000 £30,000
Total Costs £28,650 £58,350 £73,700 £160,700
Profit £1,350 £31,650 £46,300 £79,300
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You should now be able to create budgets using ABC and ZBB that reflect your business
plans accurately
For other solutions
contact
Simon Misiewicz
Web: www.optimise-gb.com
Email: [email protected]
or through
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