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- Harini S.
Basics
Problems and solutions Advantages of ABC
The traditional methods of allocating costs use blanket rates at the plant or department level
Cost Object Item for which cost measurement is required Cost Driver Factor that causes a change in the costs of the activity; can be a resource cost driver or activity cost driver Direct cost items: Direct labor (use actual employee rates) Raw material Purchased components Outsourced manufacturing services Support cost items Research & Development Customer service
Basics
Problems and solutions Advantages of ABC
to learn how firms are modifying their accounting and control systems to help them manage in the new manufacturing environment, I visited a select set of innovative firms.
One company reorganized manufacturing to create a smooth production flow, butbenefits from reorganization were impossible to quantify the
accounting system accumulated only total project costs there was no way to compute productivity measures or unit costs for items being produced using the new manufacturing philosophy
Two companies implemented JIT and total quality managementBut continued to use a standard costing system that allocated all costs based on often obsolete direct labor costs, even though direct labor represented less than 10 percent of total manufacturing cost.
5 stages of ABC
Identifying different activities in an organization Relating the overheads to distinct activities Determination of cost drivers Create cost pools to collect the activity costs having the same cost driver Calculation of activity cost driver rates and attribution of costs to products and services
Examples of Activities
Unit-level Activities are performed each time a unit is produced or sold. Batch-level Activities are performed when a group or batch is produced. Product-level Activities are required to maintain a particular product or service. Customer-level Activities are required to service a particular customer or channel of distribution.
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Salaries
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Problem on ABC
ABC is a multiproduct company, manufacturing 3 products A, B and C. The budgeted costs and production for the year ending 31st March, 2004 are as follows. The budgeted direct labour rate was Rs.10 per hour and materials cost was Rs.2 per kg. Production overheads were budgeted at Rs.99450 and were absorbed to products using direct labour rate. ABC is now considering to adopt ABC. The following additional info is available: Budgeted overheads were analysed into the following: a. Material handling Cost driver: wt of materials handled Rs.29100 b. Storage costs Number of batches of material Rs.31200 c. Electricity Number of machine operations Rs.39150
A Production qnty (units) Direct Materials (kg) Direct Labour (minutes) For complete prod, batches of materials required Number of machine operations per unit 4000 4 30 10 6
B 3000 6 45 5 3
C 1600 3 60 15 2
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Advantages of ABC
Helps understand the behavior of overhead costs and their relationships of products, services, customers and market segments Helps allocate resources to those activities, that will increase shareholders value Links profitability analysis to operational decisions
Ensures that the cost of non-value added activities is visible to the management
Provides right information for performance measurement because it focuses on activities rather than resources
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Contribution margin analysis: No longer relevant/ Strategic cost management: The New Paradigm (Kaplan, JMAR 1990) Profit priorities from activity-based costing (Cooper and Kaplan,
HBR 1991)
Activity-based systems: Measuring the costs of resource usage (Cooper and Kaplan, AH 1992)
Implementing ABC
Evaluating the Impact of ABC Implementation
Case and Field studies The impact of contextual and process factors on the evaluation of activity based costing systems (Anderson & Young, 1999) Factors influencing the performance of activity based costing teams (Anderson, Hesford & Young, 2002) Large sample: surveys and archival financial data Measuring the success of activity-based cost management and its determinants (Foster & Swenson 1997) The association between activity-based costing and manufacturing performance (Ittner, Lanen & Larcker, 2002) The impact of ABC techniques on firm performance (Kennedy & The association between ABC and improvement in financial performance (Cagwin & Bouwman, 2002)
Affleck-Graves, 2001)
Thank you.