ACTIVITY BASED COSTING

(ABC)

ABC TECHNIQUE HAS BEEN OF RECENT ORGIN AND IS PRIMARILY CONCERNED WITH ABSORPTION OF OVERHEADS(INDIRECT COSTS)IN AN ORGANISATION HAVING PRODUCTS THAT DIFFER IN VOLUME AND COMPLEXITY OF PRODUCTION .

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.

With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either:Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).In a business organization, the ABC methodology assigns an organization's resource costs through activities to theproducts and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives

DEFINITION

(CIMA) LONDON DEFINE IT AS “A TECHNIQUE OF COST ATTRIBUTION TO COST UNITS ON THE BASIS OF BENEFITS RECEIVED FROM INDIRECT ACTIVITIES , Eg:ordering,setting up,assuring quality”

SIGNIFICANT TERMS

Cost objects

Genarally the products are cost objcts. But the customers , services or locations can also be the cost objects.

Activities

These consist of aggregate different tasks and are concerned with functions associated with cost objects.

Two type of objectives Support activities Production process activities

Suppoert activities are for example

Schedule production Set up machine Purchase materials Inspect items Customer orders Supplier records

Under the production process activity machine produts and assembled products are included within this production process.

Cost drivers

A cost driver is a factor the change of which results in a consequential change in the total cost of a related object.

Examples of cost drivers Machine setups Purchase orders Machine time Shipments Inventory movements

ELEMENTS INVOLVED IN THE ABC

ACTIVITY ACTIVITY COST CENTER COST DRIVERS PROCESS COST OBJECTS NON VALUE ADDING ACTIVITIES

STEPS INVOLVED IN THE ABC

EVALUATION OF PREVALENT COSTING SYSTEM IDENTIFYING ACTIVITIES SELECTION OF COST BASIS DETERMINING COSTS POOLS ASSIGNING COSTS POOLS IDENTIFYING OUTPUTS SELECTING SUITABLE COST DRIVERS COPUTING COST DRIVER RATES IDENTIFYING COST TO PRODUCTS TEST RUN