ABC Model for a University

8/14/2019 ABC Model for a University

1/20

ACTIVITY BASED COSTING-ACTIVITY BASED COSTING-PRACTICAL APPLICATIONSPRACTICAL APPLICATIONS

By

Parmit Choudhury (08BS0002164)Rishabh Gutgutia (08BS0002691)Rahul Chandalia (08BS0002495)


2/20

What is ABC?What is ABC? Activity based costing is an accounting

methodology that assigns costs to activitiesrather than products or services

This enables resource and overhead costs to be

more accurately assigned to the products andthe services that consume them


3/20

3

Activity-Based CostingActivity-Based Costing

Traditional allocation method

Activity-based allocation method

Cost

s

Product

s

Costs

ProductsActivities

First stage Second stage


4/20

Why use Activity-Based-Why use Activity-Based-CostingCosting Understand TRUE profitability of our customers,

products, or services Quantify the cost of non-value added activities

such as errors and reworks Identify opportunities to reduce costs and/or

increase efficiency Obtain actionable information to negotiate price

increases for unprofitable clients Understand why profitability may be mediocre

despite good strategic fundamentals Stratify overhead costs so they can be managed

more effectively


5/20

Difference Between Traditional andDifference Between Traditional andABCABC

ABC

ABC systems accumulatecosts into activity costpools. These are designedto correspond to the majoractivities or businessprocesses.

ABC systems allocate coststo products , services, andother cost objects from theactivity cost pools usingallocation basescorresponding to costdrivers of activity costs.

Relatively expensive toimplement and maintain.

Traditional

Traditional costing systemsaccumulate costs intofacility-wide ordepartmental cost pools.

Traditional systems allocate

costs to products usingvolume-based allocationbases: units, direct laborinput, machine hours.

Inexpensive to implement

and maintain.


6/20

ContdContd

ABC

Focuses on estimating the costsof many cost objects ofinterest: units , batches,product lines, businessprocesses, customers, andsuppliers.

Because of the ability to align

allocation bases with costdrivers, provides moreaccurate information tosupport managerial decisions.

Allows for non-linearity of costswithin the organization byexplicitly recognizing that

some costs are not caused bythe number of units produced.

Traditional

Focuses on estimating thecost of a single cost objectunit of product orservice.

Because of the inability toalign allocation bases with

cost drivers, leads toovercosting andundercosting problems.

Generally estimates all of thecosts of an organization asbeing driven by the

volume of product orservice delivered.


7/20

ABC-Steps toABC-Steps toImplementationImplementation


8/20

Steps to implementationSteps to implementation

Identify the Resources (expenditures) of anorganization

Determine Activities (work performed) thatare supported by Resources

Define Cost Objects (products, services,customers)

Develop Resource Drivers to link Resourcesto Activ ities

Develop Cost Drivers to link Activities toCost Object s


9/20

XYZ Ltd plans to use activity based costing to determine it product costs . Itpresently , uses a single factory overhead rate for allocating factory overheadto products , based on direct labourhours . The total factory overhead cost is

as follows .

Department Factory Overhead(Rs)

Production Support 1225000

Production (Factory

Overhead only)

175000

Total Cost 1400000

Production SupportActivities

Budgeted Cost(Rs)

Set up 428750

Production Control 245000

Quality control 183750

Material Management 367500

Total 1225000

Major activities in the production support department


10/20

Product A Product B Product C Total

Number OfUnits

10000 2000 50000 62000

Direct labour

hours

25000 10000 140000 175000

Setups 80 40 5 125Productionorders

80 40 5 125

Inspections 35 40 0 75

Materialrequisitions

320 400 30 750

Other details


11/20

TRADITIONAL ABSORPTION COSTING METHOD

Recovery rate = total overheadstotal number of direct labour hours

1400000175000 = Rs 8 / labour

hour

A B C

No of labour hours 25000 10000 140000Recovery rate 8 8 8

Total production overhead byeach unit

200000 80000 1120000

No of units produced 10000 2000 50000

Factory overhead cost perunit(Rs)

20 40 22.4


12/20

ACTIVITY BASED COSTING APPROACH

Set up Production

control

Quality

control

Material

managementTotalcosts(a)

428750 245000 183750 367500Cost Drivers No of set ups Production

ordersInspections Material

requisitionsNo ofunits(b)

125 125 75 750

Activity Rate

(a/b)

3430 1960 2450 490


13/20

A B C

Set up cost 80 * 3430= 274400

40*3430=137200

5* 3430=17150Production control 80* 1960

=156800

40* 1960

=78400

5* 1960

=9800Quality control 35*2450=85750 40*2450=98000 0 *2450=0Material management 320* 490=156800

400* 490=19600

30 * 490=14700Production

(Factory overhead only)(175000/175000 =1 )

25000*1=25000

10000*1=10000

140000*1= 140000Total Overhead Cost 698750 519600 181650

No of units 10000 2000 50000

Overhead cost /unit(ABC) 69.87 259.8 3.633

A B C

Overhead cost/unit

(Traditional method)

20 40 22.4


14/20

ABC model for aABC model for aUniversityUniversity


15/20

nnual Accounting Department Costsomparison of Traditional and ABC CostReportingTraditional ABC

Faculty Salary Research

Other avenues ServiceResearch Teaching by program

Admin. Exp PPA

Infrastructure cost BBA

Travel MBA

Events Ph.D

Misc Unused Capacity

Total Total

Efficiency informationEfficiency information


16/20

Traditional costing gives information aboutthe costs of resources being supplied.

ABC perspective on the same data providesinformation about what the collegesconstituents are getting for their money.

The problem of measuring the contributions

of departments to programs is solved. Cost of unused capacity .


17/20

Annual total cost per studentas per ABC costing (Rs )

M B A P h . D C P A

Accounts Dept CostAllocated 1727 1935 17529

Infrastructure cost 1311 2227 13300

Support Dept Cost

Support Staff 3729 6821 2355

Space 2579 4948 1060

Total Cost 9346 16931 34244

Disparity among variousDisparity among various

departmentsdepartments


18/20

Help estimating the amount of financial aid. In governments and not-for-profits

organizations, expenditures must be linkedto specific institutional objectives.

Level of expenditures must be assessed inrelation to the priority assigned to thoseobjectives.

Cost data necessary to assure consistencybetween expenditures and objectives.

No comparable mechanism to detect androot out inefficiencies.


19/20

Support Staff cost per student per programProgram No. of Students Cost per student

MBA ### ###

BBA ### ###

Ph.D ### ###

Space cost per student per program

Program No. of Students Cost per Student

MBA ### ###BBA ### ###

Ph.D ### ###

Support costsSupport costs


20/20

ThankThank

youyou

Documents

ABC Model for a University