Steps used in activity base costing?
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Activity-based costing is a more accurate cost management system than TCA. One would use the ABC method when overhead is high, products are diverse, cost of errors high and competition is stiff. Traditional Cost Accounting is unable to calculate the 'true' cost of the product. TCA arbitrarily alloca…tes overhead to the costs of objects. Total company's overhead is allocated to the products based on volume based measure e.g. labor hours, machine hours. (MORE)
Traditional based costing systems typically use a single overheadpool - that is a single accumulation of costs that are not directlyidentifiable as product part costs or as labor. This would includesupply and maintenance expenses, allocations of managementsalaries, depreciation, etc. Activity based… costing utilizes a lot of smaller more targeted costbuildups that are accumulated based on "activities". For instance,if purchase orders are only required from some vendors, then thecost of p.o. preparation and mailing is included in a smalloverhead pool that is only allocated to the products that use thoseparts. If a machine setup process is only needed for the processingof certain parts, then the cost of the setup is included in thepool for only those parts, etc. Some advantages for the (ABC). 1. It facilitates delegation of decision making. 2.It helps management promote the concept of management byobjective in which managers agree on a set of goals. 3. It provides a guide to the evaluation of performance and helpsto establish standard of performance, which are then used forcomparison purpose. 4. It permits effective use of the concept of management byexception which means that the manager's attention is concentratedon the important deviations. (MORE)
ABC....why? The problem with Traditional costing is that it caneasily over-allocate overhead to cost objectives. Traditionalcosting is production volume driven so its would be easy but yetinaccurate to assign a Skittles production with more overhead thansay a the division within the same company tha…t makes custom pies.Activity based costing accounts for the multiple costs that go intomaking a product or service thus making allocation of overhead moreefficient and allowing managers to make better business decisions.Derek Coleman (MORE)
Advantages of Activity Based Costing System : Activity based costing system has the following main advantages / benefits: . More accurate costing of products/services, customers, SKUs, distribution channels. . Better understanding overhead. . Easier to understand for everyone. . Unit cost rat…her than just total cost. . Enables costing of processes, supply chains, and value streams (MORE)
What is Activity Based Costing ? . Activity Based Costing(ABC) Is a more recent approach to product costing ,pioneered by Professor Kaplan and Cooper . ABC is an attempt to reflect more accuratly in product costs those activities wich influence the level of support overheads includes such items a…s Inspection, Dispatch, Production Planing , Set up, tooling and similar costs.. ABC system uses many drivers as absorption bases. Because of this , it claims that the use of ABC and several cost driver rates produces more realistic product or service cost specialy when the support costs are high. (MORE)
The Traditional costing system used to allocate/assign overhead costs to products by using only volume based cost drivers. In fact, these traditional systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant facto…ry costs. Overheads costs were relatively small and the distortions arising from inappropriate overhead allocations were not significant.. Danish Ayub (MORE)
Activity Based Costing does the calculation of costs, that can be segregated as Product, Service, Business Sustaining and Available to Use Costs. Mere calculation of those costs practically would not help anybody. Once has to go beyond those calculations and anlyse those costs. After analyzing (whic…h can be performed in various ways) find out the action poins and work on them.. Activity Based Costing is a concepts that can be used to support for various objective of the company. These objectives can be grouped in three parts a) Product and Customer Profitability b) Process and cost improvements c) Resource planning. (MORE)
Answer . Traditional costing and activity-based costing (ABC) is to comment on the uniqueness of the products received. In traditional based costing, costs can be allocated to all products, because they are not unique. Traditional based costing works well for homogenous products that go through t…he same manufacturing process. ABC works well for products that are not homogenous and that can be run into batches. It helps apply costs to products that perhaps have had more "activities" applied to them; so therefore, they should be allocated more costs. For an example, assume that you and your friends go to a restaurant as a group. At the end of the meal, you must decide how the bill for the group should be shared. One alternative is to figure out the cost of what each individual consumed and divide up the bill accordingly. Another alternative is to split the bill equally among the individuals. In this example of of the restaurant, if the consumers split the bill up equally, they would be applying the same costs to each of their meals. They would be in a sense saying that each meal provided the same value. However, if they split the bill up according to the consumption of each individual, so in a sense allocating the costs out specifically, they would be acknowledging that each meal did provide different value, so the person eating a hamburger should pay less then a person eating a lobster. (MORE)
The concepts of ABC were first introduced within the manufacturing sector in U.S. during the 1970s to 1980s. It has been later refined and improved upon over the years.. For example, a machine manufactures two products. Assuming that the production volume of the two products is the same, using trad…itional costing methods, the cost of using the machine will be factored by two and assigned to the two products. However this might not be correct as one product might require more processing time in the machine than the other.. Traditional costing methods always assume a relation between overhead and the production volume. It always fails to take into account the size or complexity of the product. In reality, it is not safe to assume that the manufacture volume of the finalized product is directly proportionate to the product cost as not all overheads vary with the number of units produced. With traditional costing methods, there is always a danger of one product subsiding another.. Over the past century, as firms have grown larger than before, there is a real need for an accurate cost management methodology. ABC soon gained widespread use as traditional costing methods always used a percentage to calculate the indirect costs into direct costs. However as indirect costs rise, the margin of error becomes greater and thus makes the calculation vastly inaccurate. Instead, ABC focuses on indirect costs and traces rather than allocating each expense to the particular cost thus making an indirect cost direct.. ABC stands out by breaking down the costs into a very detailed level. This information will give management a very clear picture of which processes come with high costs but little value and how to improve the process or to eliminate the process entirely. With such information, management will be in a better position to make strategic and better informed business decisions.. ABC stands out from traditional costing methods especially when:. - overhead is high,. - products are complex. - Cost of error is high. - Competition is stiff (MORE)
ABC is generally used in the manufacturing industry, but I suppose if you have distinct services that you are providing you could make it work. You'd have to be able to separate your costs between the different services that you offer. Perhaps setting up various cost centres, or activity codes for t…he employees to charge time to for each job that they are working on might work. (MORE)
Activity Based Costing (ABC) is one of several approaches to job costing. \n. \nTraditionally, job costing has been measured by allocating all direct costs associated with a certain job as well as 'a fair share' (usually based on direct labour hours or volume) of the total indirect costs/overheads …incurred across all product lines.\n. \nThis traditional approach was appropriate to production that was labour-intensive, attracted a low level of overheads and enjoyed a fairly uncompetitive market.\n. \nIn more modern times however, production is increasingly machine-driven, overheads are higher (due to more rapid depreciation of equipment, maintenance and electricity costs) and products compete in a global market.\n. \nActivity Based Costing seeks to identify the causes (or drivers) of indirect costs and apply them more selectively to particular 'activities'. This means that product lines which are simple and quick to make in large quantities will be 'costed' more competitively, only including overhead costs 'caused' by that particular job; while smaller more specialised product lines will be costed at a higher rate.\n. \nUnder a traditional job costing approach which allocates overheads in proportion to volume, the simple product line producing large quanities would have attracted a far greater share of the indirect costs making it less competitive in the marketplace. (MORE)
Problem relating to the implementation of activity based costing and activity based management system?
Answering "Problem relating to the implementation of activity based costing and activity based management system
Hi. Activity Based Costing could be seen as the 'Cause-and-Effect' realtionship in the costs. If we extend this logic then we can segregate all the costs in four sections.. a) Product Costs b) Customer Costs c) Business Sustaining Costs d) Cost available to use. In this sense the Activity Basedd …Costing gives an accurate costing picture. (MORE)
Many argue that ABC actually discourages improvement to operationalstrategies that encourage proper use of resources. It is impliedthat it may not be as cost effective as expected.
Following type of companies . 1) Those who want to perform better . 2) Those who want to be competitive What specific types of companies would be better served with variable costing as opposed to absorption costing? Why?
Activity Based Costing Disadvantages . Â· More time consuming to collect data. Â· Cost of buying, implementing and maintaining activity based system. Â· Makes waste visible which some executives and managers don't want their boss to see. It may be difficult to set up and estab…lish, particularly if an organisation is using more traditional accounting methodologies. (barriers to change) . Can be time consuming if all activities are to be costed . May provide too much detail - obscuring the bigger picture. (MORE)
There are several limitations to ABC. Firstly it is expense to implement and maintain, both in time and money. It still faces issue allocating some overheads to activities, for example supervisor salaries. Management and employees can be resistant to the data it provides as it can make their perfor…mance look poor. They may even provide poor quality source data if they feel threatened. (MORE)
The best way to figure cost, and driver cost is to install a vehicle tracking system. This will give you very accurate reporting on employee use and time. In addition, you can track your vehicles and be notified if they leave a route have been stolen and much more. I recommend the Millennium Plus, i…t is the latest technology and is very good value offering many useful features. (MORE)
This approach aims at deleting all the activities that do not add value and support all the activities that add value. Accordingly, the organization avoids all costs that are paid for no reason, i.e will save more money to support and enhance the quality of its final product/s.... etc. Written by: S…hafiq Dweik - Jordan firstname.lastname@example.org (MORE)
Activity Based Costing Advantages . More accurate costing of products/services, customers, SKUs, distribution channels . Better understanding overhead . Easier to understand for everyone . Utilizes unit cost rather than just total cost . Integrates well with Six Sigma and other cont…inuous improvement programs . Makes visible waste and non-value added . Supports performance management and scorecards . Enables costing of processes, supply chains, and value streams . Activity Based Costing mirrors way work is done . Facilitates benchmarking . Activity Based Costing Disadvantages . More time consuming to collect data . Cost of buying, implementing and maintaining activity based system . Makes waste visible which some executives and managers don't want their boss to see (MORE)
mechanics of ABC system consists of : -overview -first-stage allocation -the other activity cost pool - Computation of activity rates - Second-stage allocations of costs to cost objects - Product and customer margins---activity view
False. Activity-based costing is used to allocate indirect cost into direct costs.Regardng direct cost, traditional costing is as appropriate as activity-based costing.
Activity Based Costing provides:. More Accurate . Product/Service Profitability . Customer Profitability . Distribution Channel Profitability . Make versus Buy Decision . Process Costs . Superior Information . Capacity Considerations . Automation Decisions . Outsourcing Decisions . Supply… Chain Determination . Transfer Pricing Determinations . Acquisition Synergy Calculations . e-commerce Decisions . That is why activity based costing is preffered.. Moreover,. Brimson identifies benefits from Activity Accounting:. Providing insight into the fastest-growing and least visible element of cost-overhead . Improving profitability by monitoring total life-cycle cost and performance . Improving the effectiveness of budgeting by identifying the cost/performance relationship of different service levels . Encouraging continuous improvement and total quality control because planning and control are directed at process level . Linking corporate strategy to operational decision making . Facilitating elimination of waste by providing visibility of non-value added activities . Improving make/buy, estimating, and pricing decisions that are based on product cost that mirrors the manufacturing process . (MORE)
In a simple answer, yes. Activity based costing can be a valuable tool for any environment that either makes something (manufacturing) or delivers something (service - such as IT outsourcing). One option would be to use driver data mapping services to specific customers to calculate "actual" cost es…timates by service by customer in addition to tradional "activity" analysis. (MORE)
A key feature of activity-based costing is realizing that the valueof a product changes as it is being produced. This would mean thatraw materials should cost less than the finished product. Forexample, a dress starts out as just a piece of material, but afterit is sewn together, it has more worth t…han when it started. (MORE)
This approach aims at deleting all the activities that do not add value and support all the activities that add value. Accordingly, the organization avoids all costs that are paid for no reason,
\nactivity based costing does not promote TQM(total quality management) and continuous improvement but attribute based costing promotes the both.
Greetings. . Your questions does not tell about the existing costing system but I assume that you are using the 'traditional' way of costing as standard costing. . The major deficiency is that when we talk about costing, we are always assuming that is 'Product Costing'. By doing this we take all t…he costs to the product. This is not necessarily true. There are various reasons that cause costs in your organization. These could be Products, Customers, Channels, Capacity built, to sustain business (typically called as 'cost object' in ABC) etc. . Another major difference is that ABC first calculates the cost of various activities and then it takes to the cost objects. This helps in understanding the root causes for the costs and can help in improving the costs. . It gives insight into the performance of the processes in the organization as to how much of the process is really 'value adding' to the organization. The 'non value adding' part of the processes can be eliminated or reduced. . Typically the functional managers are informed about the actual expenses v/s budgeted expenses. With this information the managers can be either happy or sad. They cannot be smarter. ABC can tell the functional managers how they have utilised their resources. . I hope I have provided some information to you. You can visit my blog on the subject at www.activitybasedmgmt.blogpsot.com or write to me at email@example.com. . Rajendra Patil (MORE)
Activity-based costing (ABC) systems for applying overhead is a two-stage procedure. . The first step begins with identifying significant activities in the production of the products (that is grouping similar activities into an activity pool ) and assigning a cost to that pool according to the a…mount of resources consumed by the activity pools. . In the second step: . A cost driver (an event that results in the incurrence of cost) is identified and quantified ($$$) for each activity pool. . A pool rate is computed for each activity by dividing the cost of each activity pool by the respective cost driver quantity. . The activity cost for each product line is determined by multiplying the pool rate by the cost driver quantity incurred by each product line . . Finally, to arrive at the activity cost per unit of product the activity cost for each product line is divided by each product line's production volume. The advantage of this system of applying cost is that it fairly and reflectively distributes cost among products because of the incorporation of multi cost drivers. At each step of the production (activity pools), there is a cost driver that has a rate that reflects the cost of producing with that activity. Thus by the end of the production, the costs assign are reflective of the process and costs. Hope that answers your question :) . (MORE)
Contribution margin tells the management for important decision that how much a single unit contributing towards recovery of fixed cost. Activity based costing allocates the overhead costs to activities based on number of activities instead of predetermined rate.
Activity based costing is the method in which overhead cost isallocated based on activities performed by departments and not byusing any predetermined rate.
In Activity based costing all overheads arecharged to function or department based on activities they performwhile in absorption based accounting, overheads are apportionedusing some kind of base rate like labor hours or machine hoursetc.
Activity Based Costing (ABC) is a procedure used to assign overhead cost to products or services that are produced. (I actually just answered this elsewhere, if you want more detail see: http://wiki.answers.com/Q/How_does_Activity-Based_Costing_work ). . Activity Based Management (ABM) is the us…e of ABC to improve business operations. That is with an ABC system, management uses the information and data obtained from the system to make decisions or changes that will help the business to be profitable. Such a way is to eliminate any non value added costs which could be done by conducting activity analysis (root causes of problems, cost triggering activities, etc) and activity evaluations (reviewing performance measurements). Another illustration of ABM is creation of customer profitability analysis , which uses ABC to determine the activities, cost and profits that come with serving a particular customer. Following this, managers will have a better idea of which customers they should continue to work with and which they may want to consider dropping or have to find a way to reduce the cost of serving. Thus, in summary, ABC and ABM are not synonyms, but are two interrelated processes. (MORE)
An Activity Based costing always starts with defining your objective. why do you want to implement this system? This definition is very important. Then the scope of the project and then the phases. The typical onjectives of the ABC system would fall under one the following three; 1) Understand Pro…duct, customer profitability 2) Understand the process costs and the cost drivers for them 3) Planning resource (MORE)
Activity Based Costing In an ABC structure, organizational departments that have served as cost centers, where costs are accumulated for allocation to products or services, are replaced by organizational activities through which costs are viewed. The heart of ABC is to trace and account for the poo…l of fixed overhead costs and show that they are really variable. The crucial aspect of ABC is its focus on the causality and variability with respect to operations and resource consumption in organizations. This focus can be examined in detail using four categories of activities and consumption: unit-level expenses, batch-level expenses, product-level expenses, and facility-level expenses. Unit-level expenses very proportionately with the production volume in units. These costs are typically materials and supplies. Batch-level expenses are incurred as a batch of products is manufactured. These expenses are setups, quality inspection, and procurement. Product-level expenses are related to the activities performed to support specific products in a company's product line. These costs are typically seen when a company makes engineering and product design changes. Finally, facility-level expenses are common to various product lines, and cannot be logically attributed to specific products. Examples include the plant superintendent's salary and property tax on the plant. If properly implemented, ABC can become a powerful tool for a company in costing products and services, evaluating performance, formulating pricing strategies, and making product and customer mix decisions. Recent studies have found the first benefit from ABC is the realigning of the involved organization's expenses from functional categories and departments to activities and business processes. The information gained from ABC was to be used to make decisions on outsourcing, eliminating nonessential activities, and improving efficiency. The hardest part of ABC implementation was reported as identifying and measuring cost drivers. The identified drivers were used to connect activities to products, customers, or other cost objects. ABC reveals that low-volume, complex products tend to be more expensive than more traditional standard cost systems have indicated. Additionally, pertinent actions are required to turn the ABC findings into actual cost reductions to improve the companies' bottom line performance. Usually, insufficient time exists for senior management to establish profit priorities. Simply, the radical changes brought on by ABC create a problem in that management is not able to respond quickly enough or use the information to the greatest advantage because it requires them to break with everything they know about their business. Meanwhile, the radical change is hindered by most companies being unprepared to make radical changes or being willing to make changes, but ill-equipped to make the necessary changes to take full advantage of the information. ABC is only effective when the possible changes are identified in advance and then planned for before implementation. Companies need an explicit plan for line managers to execute desirable actions based on ABC. Thereby, desirable actions could be taken in the areas of costing products and services, evaluating performance, formulating pricing strategies, and making product and customer mix decisions. Without such an explicit plan, ABC may never reach beyond the finance or other group that developed the model. Target Costing Target costing is a market-driven system of cost reduction, focused on managing costs at the development and design stages of a product. The Japanese believe that cost reduction activities, especially in automated plants, carried out in the production stage of a product have a limited effect. The effect is limited because processing methods, type of equipment, production flow, and other aspects of the production environment related to workers and quality are determined and fixed at the product planning stage in an automated plant. Target costing reveals a direct link between the marketplace, corporate long-term profit goals, and cost management practices. The process begins with finding, through rigorous market research, a quality product that can appeal to potential customers. The expected price at which this product is most likely to appeal to customers is also determined by the new-product team. This sales price generally reflects not current, but future, market conditions and reflects the team's best efforts, although the price may change over that product's life cycle. Based on the company's long-term profit plans, the new product's target profit is calculated and is subtracted from the expected sales price to arrive at the allowable cost. By design, the allowable cost is too stringent to achieve through current technologies. The cost estimates are based on current engineering and production technologies. The target cost is set somewhere between the allowable cost and the current estimated cost. In calculating the target profit, Japanese companies use the rate of return on sales (ROS) rather than return on investment (ROI). ROS is more technically convenient to relate profit to low-volume products. This practice reflects Japanese manufacturers' tendency to focus on the profitability of the portfolios of related products rather individual products. After the total target cost is set for a newly approved product plan, the engineering planners and cost management personnel divide the total target cost for the product into various product cost elements based on the engineering design and cost requirements. The achievement of the target cost requires intense value engineering (VE) activities and close cooperation among departments, such as engineering, production, and marketing. Value engineering (VE) was first developed by General Electric and is geared toward producing innovative, yet cost effective, product features that will satisfy customers' needs. The features have already been determined based on rigorous market research. The sales price incorporates the appealing features based on the market research.For products and services under VE, functions are defined, and costs incurred to perform those defined functions are measured against the functions. One of the primary reasons that Japanese managers find target costing so attractive is its compatibility with the management strategies they use to deal with the shortening product life cycles in today's market. They need to monitor the profit and cost performance in short intervals because they want to recover their investment in a short period of time. Target costing allows companies to translate the cost reduction strategy into a series of equivalent actions according to the relationships to the defined functions. This ability to translate the target into actions is very powerful because cost accounting is connected to products very closely, which workers find very easy to understand. The close connection is in contrast to the loose connection between cost accounting and various functions and products in standard cost systems. (MORE)
I would like to answer this questions humorously. Pl do not use Activity Based Costing if; 1) You do not want to understand the profitability of the products, customers, channels. the true costs and cost drivers for the profitability. 2) You do not want to set targets based on the profitabilit…y. 3) You not want to optimize the profits by optimizing customer segments 4) You do not want to optimize the processes and their costs 5) You not want to use a flexible reporting system that helps to take operating, tactical and strategic business decisions. More on this on the link below. (MORE)
Activity-based costing tries to take the nonuniformity of resource consumption across products into account in the assignment of costs.
ABC information is extremely helpful in the strategic analysis of areas such as process and plant layout redesign, pricing, customer values, sourcing, evaluation of competitive position, and product strategy.
Since the focus is on activities, improved cost management is achieved through better managing those activities that consume resources and drive costs.
Resources are inputs, such as materials, labor, equipment, and other economic elements consumed by an activity in the production of an output. Outputs are products, services, and accompanying information flowing from an activity.
Activity-based costing is a form of cost refinement, designed to obtain greater accuracy than traditional allocations in cost assignments for product costing and decision-making purposes.
Activity based costing has primary difference of allocation ofoverheads which are based on activities performed by any departmentwhile in traditional costing system overheads are allocated onpredetermined rate which may be not very accurate.
What type of organization is most likely to benefit from using activity-based costing for product costing?
The companies benefiting the most from ABC would be companies with a significant amount of overhead pertaining to a diversity of activities in providing goods (or services) to customers whose demands also vary .
What are the cost drivers which are used in apportioning overheads cost under activity based budgeting?
Cost drivers are activities due to which cost incurred for expampleas many time as machines are setup for production as many timemachine setup cost will be incurred so matchine setup is costdriver.
Organization-sustaining costs, customer-level costs, and the costs of idle capacity should not be assigned to products. These costs represent resources that are not consumed by the products.
The important characteristics of ABC are noted below: v 1)Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system. v 2)The more appropriate distinction between cost behaviour patterns are volume(scale) rel…ated, diversity(scope) related, events(decisions) related and time related. v 3)Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behaviour pattern. In tracing overhead cost to product, a cost behaviour pattern must be understood so that appropriate cost driver could be identified. (MORE)
a activity costning is you are costing a what evr and the actity is a you are active in all of the subject
Activity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM's applicability limited to manuf…acturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing. (MORE)
Activity based costing allocate the overhead expenses based onactivities performed and that's why it is an accurate way toallocate overhead expenses while in absorption costing, overheadsare allocated based on some ratios or predetermined rate which isnot accurate method of allocation of cost.
Any company providing a "dynamic" good, where the methods are changing could benefit from activity based costing. Goods and services which always have the same overhead cost do not need such a schematic.