activity based costing by arbab
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Transcript of activity based costing by arbab
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Muhammad Mustafa ( Mbasp09-A-001)Muhammad Arbab Jehangir (003)Muhammad Nadeem (014)Rizwan Haider (083)
Muhammad Kazim (087)
ACTIVITY BASED COSTING AND TRADITIONALACTIVITY BASED COSTING AND TRADITIONAL
COSTING SYSTEMCOSTING SYSTEM
COMSATS INSTITUTE OF INFORMATION
TECHNOLOGY, SAHIWAL
Department : Management Sciences
THE WMTS ARTS
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WHAT IS COST?
What isActivity Bas Costi Syst ?
I PO TANTANCE OFACTIVITY-BASED COSTING
STEPS FO I PLE ENTINGACTIVITY-BASED
COSTING
What is Traditio alCosti Syst ?
ACTIVITY-BASED COSTING VS T ADITIONALCOSTING
LI ITATIONS OFACTIVITY BASED COSTING
SU ARY
ROADMAPOF THE PRESENTATION
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Cost is a for oi , as r d i o tary t r s, i curr d
or ot tially to i curr d to achi v a s cific
o j ctiv .
Each odificatio i li s acertai attri ute hich isi ortant inco utingand easuring thecost hich is
to serve the anagement levels inachieving their asic
o jectives of lanningandcontrol.
It is a fundamentalaxiom that acost must eunderstoodin its relationshi to theaims or ur oses hich it is to
serve.
WHAT IS COST?
According To American Accounting Association
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Activity asedcosting
(ABC)
Traditionalcosting
(TC )
METHODS OF CALCULATING COST
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ABC as first clearly defined in 7 y Ro erts aplanandW.Bruns.
They initially focused onmanufacturing industry hereincreasing technology andproductivity improvementshave reduced the relativeproportion of thedirect costs oflabor andmaterials, but have increased relative
proportion of indirect cost.
For Example, Increasedautomationhas reducedlabor,hich is adirect cost, but has increaseddepreciation,hich is an indirect cost.
HISTORYOFACTIVITY-BASED COSTING
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A method of measuring the cost and performance of
activities and cost objects.
Activity based costing (ABC) is a costing method that is
designed to provide managers with cost information forstrategic and other decisions that potentially affect capacityand therefore fixed costs. Activity based costing is ordinarilyused as a supplement to rather than as a replacement for thecompanies usual costing system.
WHAT IS ACTIVITY-BASED COSTING SYSTEM?
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ABC is acost accountingmethodology that canprovidedefinitions ofprocessed, identify hat thecost drivers of those
processes are, determine theunit costs of various products andservices, andcreate various reports onagency components thatcanbeutilized to generateactivity or performancebasedbudgets.
Amajor advantage ofusingABC is that is avoids orminimizesdistortions inproduct costing that result fromarbitraryallocations of indirect costs.
WHYACTIVITY-BASED COSTING IS IMPORTANT?
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Sales are increasebut profits aredeclining.
Overhead rates are very highand increasingovertime.
Product lines arediverse.
Direct labor is smallpercent of totalcost.
Competitors high-volumeproduct seems tobepricedunrealistically lo .
WHY TO USE ABC?
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STEP :IDENTIFYAND DEFINEACTIVITIES
ANDACTIVITY COST POOLS
STEP 2:DIRECTLY TRACE OVERHEAD COSTS
TOACTIVITYAND COST OBJECTS
STEP3:ASSIGNCOSTS TOACTIVITY COST POOLS
STEPS FOR IMPLEMENTING ACTIVITY-BASED COSTING
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STEP :
CALCULATEACTIVITY RATES
STEP 5:
ASSIGNCOST TO COST OBJECTS
STEP 6:PREPARE ANAGE ENTREPORT
STEPS
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It is a well-known fact that the traditionalcosting systems utilize a single, volume-
based cost driver. This is the reason why the traditional product
costing system distorts the cost of products. In most cases this type of costing system
assigns the overhead costs to products on thebasis of their relative usage of directlabor. For this reason traditional cost systemsoften report inaccurate product costs.
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Manufacturing and Non manufacturing cost
Cost Pool
Allocation Basis
Cost Objectives
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Decision support
Cost control
Cost
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Activity-basedcosting is morecostly to
maintain thana traditionallabor costing
system. Activity-basedcosting does not have full
support of topmanagement.
Activity-basedcosting caneasily be
misinterpreted. Organizationusingactivity-basedcosting
have to maintain 2 cost systems
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Activity-basedcostingestimates the
cost of sources consumedby cost
objects suchas product andcustomers
Theapproach taken inactivity-basedcostingassumes that cost objects
generateactivities that in turn
consumes costly resources.
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Activities form thelinkbet eencosts
andcost objects.
Activity-basedcosting is concerned
ith overhead bothmanufacturing
overheadand selling, general, and
administrative overhead.
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THANKS